THE FLAVOUR OF THE SEASON
By Ruma Dubey
Tax free. These words always sound like heaven, better than the big announcements of “SALE” and for the financially inclined; it’s like the Big Bazaar “Sabse Saste 5 din” offer. This is the time of the year when the market gets flooded with tantalizing tax free offers and this time around too, there are some good offers on the block, especially from Indian Railway Finance Corporation (IRFC) and Hudco.
This time around the offers are being termed as “great” by many due to the fact these bonds are being issued in a high interest regime and thus the yields being offered are also high. On an average, we are seeing offers of around 12% pre-tax returns and around 8.2% post-tax if you are in the 30% tax bracket and over 9.5% for those in the 20% tax bracket. And that is a very good deal!
Another change this time around is that PSUs seem to have taken the lead in issuing tax free bonds. The ‘season’ was flagged off by two offers - National Highways Authority of India (NHAI) and Power Finance Corp (PFC) which collectively raised over Rs.15,000 crore. HUDCO and IRFC tax free bonds aspire to raise Rs.11,000 crore.
This new breed of bonds are different from those issued by infra companies – L&T Infrastructure Finance and IDFC. Here, in bonds of HUDCO and IRFC, the principal amount invested will get taxed; it is only the interest earned from these bonds which will be tax free. IRFC is offering a simple interest of 8.15% to individual or retail investors for a 10-year bond, and 8.30% annually for a 15-year bond. HUDCO is offering slightly better yields at 8.22% for 10-year bonds and 8.35% for 15-year bonds. This in terms of returns means that if you have invested Rs.1 lakh, you will get a tax free return of 8.30 to 8.35% per annum which is Rs.8300 to Rs.8350 per annum on the Rs.1 lakh invested over the next 10-15 years tenure.
If one compares them with a Fixed Deposit plan, two things stands out – firstly the interest earned on FDs is taxed while that on these bonds is not. Secondly, the average rate of interest offered by FDs on the maximum 5 year tenure is around 10% and that too will attract tax. But if you have an FD which offers you yield of 11.8 to 11.9% tax free , then it would be comparable. But obviously, no one is offering such yields on FDs. With interest rate cycle on the brink of taking the downward journey, these long term tenure bonds thus offer good returns.
The allotment is on a first-come-first-serve basis. The interest coupon depends on the maturity and category of investor. Both bonds are to be listed on both the NSE and BSE, wherein on listing, investors can sell bonds they were allotted in the secondary market.
These bonds are best for those having surplus of Rs.1 lakh and above to invest. Here investors are looking at a return of 8.15% every year for ten years, or 8.3% every year for 15 years. Only investors having a long term horizon can invest in these bonds. Yes, it is better than parking funds in fixed term deposits which attract tax. If you are looking at the bonds like a stock, where you hope to make a killing in listing, be careful as these tax free bonds, like stocks, will attract tax. Any gains from sale of these bonds will be treated as capital gain and will be taxed depending on the holding period of the bond.
Tax free bonds are good only for those with a long term horizon. It is best to hold these bonds till maturity; it is only then that you will enjoy the “tax free” benefit on the higher interest rates.