PFC Zero Coupon Bonds Offer Better Returns Than Fixed Deposits; Early Exit Also Possible

Investors looking for a safe and attractive alternative to fixed deposits (FDs) may find an appealing option in the Zero Coupon Bonds (ZCBs) issued by state-owned Power Finance Corporation (PFC). With the subscription window closing on January 30, market experts say these bonds offer better post-tax returns than long-term bank FDs, along with the flexibility of early exit.

According to a report by The Economic Times, PFC’s Zero Coupon Bonds have a tenure of 10 years and one month and will be listed on stock exchanges, allowing investors to sell them in the secondary market if liquidity is needed before maturity.

How Do These Bonds Work?

Unlike regular bonds, zero coupon bonds do not pay periodic interest. Instead, they are issued at a discounted price and redeemed at face value upon maturity.

Retail investors can purchase one bond at ₹50,780, which will be redeemed at ₹1 lakh after 10 years and one month. This translates into an annualised return of around 6.95 percent before tax, and approximately 6.04 percent on a post-tax basis.

For investors putting in ₹10 lakh or more, the issue price per bond is ₹51,263, offering a slightly lower post-tax return of around 5.96 percent.

Better Than Bank FDs?

Market participants believe PFC’s ZCBs are more attractive than traditional bank fixed deposits, especially for investors in higher tax brackets.

For instance, State Bank of India’s 10-year FD currently offers around 6.05 percent interest. However, after tax, the effective return for investors in the highest tax slab drops to nearly 4.24 percent—significantly lower than what PFC’s bonds offer.

Even tax-free bonds currently provide post-tax yields in the range of 5.1 to 5.15 percent, making PFC’s ZCBs comparatively more rewarding.

Scope for Capital Gains

According to Vikram Dalal, Managing Director of Synergy Capital, these bonds could also benefit from future interest rate movements.

“If interest rates fall by 0.25 to 0.50 percent over the next 12 to 18 months, the market value of these bonds is likely to rise,” Dalal said, indicating the potential for capital appreciation if investors choose to sell before maturity.

A Safe Long-Term Option

Being issued by a government-owned company, PFC bonds are considered a low-risk investment, suitable for conservative investors seeking stable returns without exposure to stock market volatility.

Things to Keep in Mind

While the bonds offer higher returns and liquidity through stock exchange listing, experts advise investors to assess their tax bracket, liquidity needs, and long-term financial goals before investing.

With the January 30 deadline approaching fast, PFC’s Zero Coupon Bonds are emerging as a compelling option for investors seeking FD-plus returns with added flexibility.