We live in a world of intricate and sometimes volatile investment opportunities. Most of the time, one becomes uncertain where and when to put his hard-earned money concerning investment. But amid these several investment options, tax exemption bonds stand out as a strategic asset for investors and low-income earners alike, especially those seeking to optimize their return, and reduce their tax burden.
In Nigeria, Nigeria, these bonds offer a more robust and more predictable outcome. First, they are a stable stream of investment and income generation. And secondly, they are issued by the government to help support essential public sector projects.
Now, for those looking to navigate this investment opportunity, you must understand the intricacies of tax exemption bonds and the process for acquiring them in Nigeria.
This article tells it all about the nature of tax exemption bonds in Nigeria, their importance and a detailed explanation of how to access them.
What are tax exemption bonds?
Tax exemption bonds are financial securities that are issued by the Nigerian government or any authorized financial institution that provides investors with the payment of interest that is void of tax from the federal, state or local government.
In Nigeria, these bonds are mainly used by the federal government to help finance serval projects that range from infrastructural development projects to social services
Types of tax exemption bonds in Nigeria
Tax exemption bonds in Nigeria are divided based on the issue and the purpose for which these funds are being raised.
When you understand these concepts, they can help you to make informed choices and decisions on which to buy.
Now let’s examine some of these bonds.
1. Federal government bonds
The federal government bonds are issued by the federal government and it’s disclosed through the debt management office (DMO). These bonds are used to finance federal projects and other initiatives. The reason why these bonds are considered secured is because it’s backed by the government’s revenue and credit.
A major example of these bonds is the federal government saving bond which is designed for individuals and retail investors
2. State government bonds
These bonds are issued by the state governments. The Money generated is used to fund state development projects. They are also tax exemption bonds, but they might be prone to risk because the issuing state might not be stable financially
3. Municipal bonds
These types of bonds are less common in Nigeria. Municipal bonds are issued by the local government or municipal corporations to fund local projects. These funds are issued to be raised for specific municipal needs. And it is the least secured.
The structure of tax exemption bonds in Nigeria
1. Issuance
Tax exemption bonds are usually issued through a public offering, where the federal government or any accredited financial institution offers this bond to the public in exchange for funds.
The federal government is committed to paying the investors the interest periodically, together with the principal at the maturity date.
2. Interest payments
The premise of these bonds is that it’s tax exempted. Meaning the interest earned from these bonds is not subject to any tax. This of course will boost the return on investment for investors
3. Redemption phase
These types of bonds have a fixed redemption time. This redemption time is the length of time until the principal and the interest are repaid.
These redemption periods can vary, from two years to five years or more, depending on the terms of the government issuing it.
4. Financial security
The federal government issues these bonds. And while they are tax-exempt, they are also considered low risk because it is backed by the government’s creditworthiness.
It can be said the bond issued by the federal government is more secure and certain than those offered by either the state or local government.
Benefits of investing in tax exemption bonds
When you invest in tax-exemption bonds, it provides you with several benefits, that are not common to other investment opportunities. This is the reason why they are quite appealing to both individuals and institutional investors. Some of the reasons why these bonds are attractive are as follows
1. Exemption on tax
The major benefit of a tax exemption bond is the promise of not taxing the interest from the investment.
This free tax premise boosts the overall ROI, which makes it attractive and a more preferred option for those in higher tax brackets
2. A source of stable income
These types of bonds typically offer fixed interest rates. This provides a reliable and predictable source of income to investors.
This benefit is very important for l investors and individuals who seek safe returns on their capital.
3. A show of patriotism
Anyone who invests in tax exemption bonds shows that he supports and is ready to contribute to the government of the day. Remember that this fund is raised to sponsor government infrastructures and projects for public service.
This can be seen as patriotism because it aligns your financial goals with social responsibility which helps solve critical needs and support national development.
4. Little or no risk
All government-issued bonds are generally thought to be low-risk investments because they are backed by the government’s creditworthiness.
They are the issuing entity. This low-risk attribute makes them a safe choice for investors especially those looking for ways to preserve their capital while earning interest.
How to access tax exemption bonds in Nigeria
Accessing tax exemption bonds in Nigeria involves several steps.
Let’s take a look at the steps on how to access them
1. Research and Identification of opportunities
Before you embark on any investment, you must conduct proper and exhaustive research. This also applies to tax-exemption bonds. First, you must look at government announcements.
You must be abreast of the news about new bond announcements from government offices like the DMO, and the Central Bank of Nigeria. These offices provide pieces of information on the next bond offering and all the criteria.
Another source of information is the financial market News. Most financial reports also carry information about these bonds. Stay updated with sources like financial newspapers, investment journals and online financial subscriptions.
2. Understand the terms and conditions
Before you invest, you must carefully read and understand the terms and conditions for these bonds. You must know the interest rate, the maturity period, and also the process for purchasing and redeeming your capital.
3. Open an investment account
Before you can buy any tax exemption bond, you must have opened an investment account with any authorized financial institution. Make your inquiries on the Banks and other entities that have been authorized to offer these bonds
4. Purchase the bonds
When your account is ready, it’s time to buy. You do this by placing an order through your financial institution.
Follow all the necessary steps, select the type of bonds you want to buy, review everything and submit. Make sure all your information is complete.
5. Monitor your investment
Having purchased these bonds, you must actively engage and monitor your investment to ensure it aligns with your goals financially.
Conclusion
Tax exemption bonds are not new. The problem has been an awareness problem. It is so unfortunate that the majority of the public is oblivious to this low-risk investment.
It is safe to say that tax exemption bonds represent a valuable investment opportunity for the general public and corporate entities looking to enjoy a tax-free income, with these assurances of a low-risk
