Tax-Free Bonds
These are long term bonds that provides tax free returns to the investor. This financial instrument falls under fixed income asset class that is issued almost every year by select institutions with the approval of government of India. These bonds carry relatively stable ratings and are considered to be sovereign bonds due to the covering of default risks by government of India.
Who issues these bonds?
In the previous two fiscal years, the total issue of tax free bonds were about Rs.25,000 to Rs.30,000 crores. For the current fiscal (FY13-14), the approved total sum of such tax free bond issues is Rs.50,000 crores. As the government is fighting the twin deficit of CAD (Current Account Deficit) and Fiscal deficit this year (FY13-14), several institutions such as PFC, REC, IIFCL, NHPC, HUDCO, NHB, NTPC, IRFC, Ennore Ports, Airport Authority of India and Cochin Shipyard Ltd have been granted the approval to issue tax free bonds.
What is the nature of the bond?
Who issues these bonds?
In the previous two fiscal years, the total issue of tax free bonds were about Rs.25,000 to Rs.30,000 crores. For the current fiscal (FY13-14), the approved total sum of such tax free bond issues is Rs.50,000 crores. As the government is fighting the twin deficit of CAD (Current Account Deficit) and Fiscal deficit this year (FY13-14), several institutions such as PFC, REC, IIFCL, NHPC, HUDCO, NHB, NTPC, IRFC, Ennore Ports, Airport Authority of India and Cochin Shipyard Ltd have been granted the approval to issue tax free bonds.
What is the nature of the bond?
- Long term - 10, 15 and 20 years tenure
- Interest payment (coupon) at 8.25% - 9% p.a
- Coupons are paid annually and are tax free
- Pricing of the bonds linked to government security yields
- Listed on National stock exchange, can be traded in the secondary market
- 70% of the issue to be offered publicly (of which 40% to retail investors)
- 30% to be placed privately to sovereign wealth funds, pension funds etc
- Min investment: Rs.5000, Max: Rs.10 Lacs
- Pre-tax yields: 9.5%-13% p.a (depending on tax bracket)
- NRIs are permitted to invest in non-repatriable basis
- In Dec 2013, RBI has also allowed foreign retail investors to invest (but not FIIs)
Should you target it?
Although these bonds are targeted at institutional and retail investors, a financial planner would raise the question as to whether YOU should target these bonds? The answer depends on several factors but the key deciding factor is whether the returns from this instrument adequately covers any of your financial goals. Typically these products are suitable for retirees but they could well be used to meet some of your specific long term goals. If you keep buying one or two bonds each year, you would end up with a mixed bag of bonds (similar to assorted insurance policies), each with a different rate of return, maturity date and most of all difficult to track. Consulting a financial planner could help bring clarity on how much & when to add this instrument to your investment portfolio.
Although these bonds are targeted at institutional and retail investors, a financial planner would raise the question as to whether YOU should target these bonds? The answer depends on several factors but the key deciding factor is whether the returns from this instrument adequately covers any of your financial goals. Typically these products are suitable for retirees but they could well be used to meet some of your specific long term goals. If you keep buying one or two bonds each year, you would end up with a mixed bag of bonds (similar to assorted insurance policies), each with a different rate of return, maturity date and most of all difficult to track. Consulting a financial planner could help bring clarity on how much & when to add this instrument to your investment portfolio.
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