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Personal finance - Title : FAQs on Debt

Tags: Debt, Bonds, Deposits, Safe Returns, Capital Guarantee, Guaranteed Returns

Meta description: Frequently asked questions on debt, bonds and deposits

Snippet: 1. What are the tax implications of debt products? The PF and PPF are tax-free. The debt mutual fund returns are taxed at capital gains (which is typically a lower rate of tax than the highest income tax rate). Interest on fixed deposits, corporate deposits and NCDs are taxed at your marginal tax rate. So if you fall in higher tax bracket, this rate is higher. If you are a retiree and fall in a lower tax bracket, this tax may be lower than the capital gains tax above.

2. Is safety same as guaranteed returns? Not at all! Say the Timbuktu Construction Company sold you bonds that ‘guaranteed’ you a 15% interest rate. Would you buy it? Most sensible investors would not. After all, safety is not a function of the guaranteed return that the company promises to give, but whether the company itself is going to be around to return your principal.

Similarly, a Government security bought in the market may not have a guaranteed return, but it is the safest product you can ever get, since the Government will not default on its debt. This common investor confusion between safety and guaranteed returns is the main reason they fall prey to frauds and Ponzi schemes that ‘guarantee’ them a money-back and incredible interest rates. Look for safety, not

for guarantees.

3. Which product should I choose? Go by safety and tax efficiency. In general, as far as debt is concerned, choose safe products, rather than chasing the half-odd extra percentage point of return someone promised. And while choosing the product, look at tax efficiency. If you are in higher tax bracket, go for capital gains products like debt funds. If in lower bracket, opt for fixed deposits or PPF.

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FAQs on Debt