Tax Free Bonds of FY 2011-12, FY 2012-13
This article gives an overview of tax free bonds. What were the tax free Bonds of FY 2011-12, tax free Bonds of FY 2012-13, Should one book profit in tax free bonds of FY 2011-12,
Overview of Tax Free bonds
Bonds form the part of Debt as an asset class. This implies that the investor has given a loan to the issuing entity, and will be repaid at the end of the tenure as specified. Let”s understand what are Tax Free Bonds.
- Tax-free bonds are rated long-tenure (usually 10-15 years) fixed-income securities offering annual interest.
- These bonds are generally issued by government backed entities, so low risk of default, since companies have a better credit rating.
- The interest rate, also called as coupon rate, would be less than the yield of government securities of similar tenure. In Dec 2012, 10-year government bonds are trading around 8.2%. The interest rate offered by these bonds for FY 2012-13 is 7.5-8%.
- The interest on these bonds will be paid annually on a fixed date. There is no cumulative option. This needs to be shown an exempt income in your Income Tax Return (ITR)
- Interest earned would be tax free, hence the name Tax Free bonds. Tax free status of interest income is as per Section 10(15)(iv)(h) of the Income Tax Act, 1961.
- There is no tax saving on the amount invested in these bonds. Section 80C,80CCF, 80D,54EC etc are not applicable.
- Bonds are Tax free, hence issue of Tax deducted at Source(TDS) does not apply.
- These bonds are eventually listed on the Bombay and/or National Stock Exchange,
- These bonds are available for buying within a specific period during the issue period. After that one can buy from the stock exchange on which they are listed.
- Investors can sell before the full term of the bond as they are listed on Stock exchanges(BSE,NSE). However, the price you may get for selling before they mature will depend on market conditions. And one would also need to pay capital gain.
- If sold on exchanges (secondary market) any capital gain from sale is taxable. As they belong to debt category indexation benefit is available. If sold within one year one has to pay Short term Capital Gain at the normal rate, while long-term capital gains are usually taxed at 10% without indexation and 20% with indexation. Indexation is adjusting the purchasing price with inflation measured by inflation index. However as per third proviso to Section 48 of Income Tax Act, 1961 benefits of indexation of cost of acquisition under second proviso of section 48 of Income tax Act, 1961 is not available in case of bonds and debenture, except capital indexed bonds. Thus, long term capital gain tax can be considered 10% on listed bonds without indexation. (Shiv’s comment and Taxguru HUDCO – Tax Free Bonds – Tax Benefits).
- Wealth-tax is not levied on investment in bond under section 2(ea) of the Wealth-tax Act, 1957.
- At times Bonds have Step down feature which means that when you buy them from the secondary market, you get a slightly lower rate of interest than the primary subscriber.
Tax Free Bonds of FY 2011-12
Tax free bonds were issued in FY 2011-12 with coupon rates of around 8.20-8.40% per annum for 10 to 15 years. State-owned companies had issued such bonds worth Rs 30,000 crore in 2011-12. Mutual funds, insurance companies, other financial institutions, corporates, FIIs, NRIs, trusts, retail investors(individuals), all participated in these issues and many of these issues got oversubscribed on the first day itself. The bonds issued in Financial year 2011-12 (FY 2011-12) were.
|Issue||Tenure||Coupon Rate||Step Down Coupon Rate||Listing Date||Interest Payment Date||ISIN||BSE Script Code||NSE Script Code|
|NHAI||10 years||8.2%||Not Applicable||8 Feb 2012||Oct 1||INE906B07CA1||961727||NHAI1|
|NHAI||15 years||8.3%||Not Applicable||8 Feb 2012||Oct 1||INE906B07CB9||961728||NHAI2|
|PFC||10 years||8.2%||Not Applicable||14 Feb 2012||Oct 15||INE134E07190||961729|
|PFC||15 years||8.3%||Not Applicable||14 Feb 2012||Oct 15||INE134E07208||961730|
|IRFC||10 years||8.15%||Not Applicable||2 Mar 2012||Oct 15||INE053F07520||961731|
|IRFC||15 years||8.3%||8.10%||2 Mar 2012||Oct 15||INE053F07520||961732|
|HUDCO||10 years||8.22%||8.1%||20 Mar 2012||5 Mar||INE031A07832
|HUDCO||15 years||8.35%||8.20%||20 Mar 2012||5 Mar||INE031A07840||961734||HUDCO, N2|
|REC||10 years||8.13%||7.92%||4 Apr 2012||1 Jul||INE020B07GG9||961743|
|REC||15 years||8.32%||8.13%||4 Apr 2012||1 Jul||INE020B07GH7||961744|
Tax Free Bonds of FY 2012-13
State-owned companies had issued such bonds worth Rs 30,000 crore in 2011-12, encouraging the government to allow firms to raise Rs 55,000 crore in 2012-13 but the response this year has not been good.
The tax-free bonds issued by state-owned companies have found few takers so far this financial year, compared to last year. Lower rates, IPOs of Bharti Infratel,Care and modest broker commissions have been some of the reasons for the tepid investor participation in these quasi sovereign bond issues.The bond issued by Rural Electrification Corp (REC), which closed on 10th Dec 2012, raised about Rs 3,000 crore, against the target of Rs 5,500 crore. Power Finance Corporation (PFC) extended its deadline by a week as it could garner only Rs 596 crore till the scheduled closing date of 21 December. IIFCL, Hudco and IRFC have lined up tax-free bond offerings. Business Standard Tax-free bonds find few takers, MoneyLife’s Poor show of PFC tax-free bonds is a hurdle for the deluge of new offerings about to come explains factors in detail.
Should one book profit in existing tax free bonds
Many of the brokers might encourage you to sell your existing investments in tax-free bonds to invest in the new tax-free bonds. Should one book profit in existing tax-free bonds and invest in new issues?
Quoting from EconomicTimes Why one should book profit in existing tax-free bonds and invest in new issues
Since the already listed bonds give you a yield between 7.2 and 7.5%, which as of now looks lower than the primary market offering where new bonds offer 7.5-8%. Hence new investors should apply through the primary market. Existing investors may book profits by selling their existing tax-free bonds in the secondary market and invest again through the primary markets
Say if you are invested in 8.2% 10-year NHAI bond (face value Rs 1,000) in January 2012 through the primary market. This bond trades at Rs 1,077 in the secondary market. Since it trades at a premium to its offer price, the yield for a prospective investor falls. So, for anyone who buys these bonds now, the yield will be only 7.18%. Also, since the bond is 10 months old, the balance tenure will be 9 years and 2 months. As against this, you are getting 7.71-7.86%, from REC, as there is a gain of 50 to 70 basis points. Similarly, the 15-year HUDCO bond trades at Rs 1,119. If you were to buy this, you will get a yield of 7.49%.So if you sell these bonds and subscribe to fresh offering from REC in the primary market you stand to benefit.
But you will have to pay short-term capital gain (STCG) tax as per your income tax slab. So, your returns would effectively get reduced by the STCG tax you pay and also by the brokerage you pay when you sell your existing bonds. If the bonds carry Step Down feature the buyers of these bonds in the secondary markets will not get original coupon rate but a lesser one.
Quoting from Onemint’s Should you book profits in last year’s tax-free bonds to invest in new tax-free bonds?
In what situation or when should you book profits in the old tax-free bonds?
1. If an investor wants to book profits, he/she should do that either after completion of 1 year from the date of allotment or after the next ex-interest date. Investors in the 30% or 20% tax bracket can save their tax outgo by selling these bonds after a year and pay only 10% flat long-term capital gain (LTCG) tax on these listed bonds. Moreover, the market price of these bonds fall two days before the ex-interest date. So, one can sell these bonds after this date to minimise their tax outgo.
2. If you are 100% certain that you will hold these bonds for more than 7-10 years, then also you might think of selling the existing bonds. But, there would not be extraordinary gains out of it.
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Tax free bonds locks money for long tenure at a competitive interest rate but as they pay back interest every year , which is tax free, the power of compounding is lost. As our reader Ashok pointed out the risk of continuing profitability of the issuing organizations over the tenure of the bonds is also a risk worth evaluating What do you think of Tax free bonds? Did you invest in Tax free bonds in FY 2011-12 or FY 2012-13? Where are you investing these days?What do you consider before Investing?