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Savings Certificates vs. T-Bonds: Which Investment Offers Better After-Tax Returns?

By Asif Khan, CFA

Chairman

EDGE AMC Limited

Posted on: 25 Jun, 2024

A newer version of this post has been published to reflect tax law changes. Please read that here. 

Savings Certificate vs T-Bonds

Tax season is around the corner. Two popular ways to get investment tax rebates are via investing in Savings Certificates and T-Bonds.

Various Savings Certificates in Bangladesh offer various effective rates of return. These rates are administered rates and thus do not change with market forces. For savings certificates, source tax is usually 10% (except for very small amounts), which is the final tax. Here are the after-tax effective rate using 5% source and final tax

1. Family Savings Certificate (5 years): 10.44%
2. Bangladesh Savings Certificate (5 years): 8.61%
3. 3 month profit bearing (3 years): 10.40%

In contrast, a 5-year treasury bond now yields 12.4% before tax. For a first time investor, the decision between these two options is simply a question of tax rate. The after-tax return on the bond at different tax rates are

5%: 11.78% (beats all savings certificates)
10%: 11.16% (same as above)
15%: 10.54% (same as above)
20%: 9.92% (worse than 1 and 3 but better than 2
25%: 9.30% (same as above)

In this example, we assumed that the person investing has no prior exposure to savings certificates. If there are existing investments then as per the government regulations the profit rate on savings certificates will be lower and we need to rerun the comparison with the lower rates.

TLDR: For most people investing in T-Bonds is a better option than Sanchaypatra at present. However, depending on the amount and tax bracket things could differ among people.