In FY 2015-16 7 Public Sector Units or PSU will raise funds worth Rs 40,000 crore through Tax Free Bonds . It was a massive hit when it was last launched in 2013. This article gives overview of Tax Free Bonds,why are they popular, about tax on Tax Free Bond, Interest Rate of Tax Free Bonds, History of the Tax Free Bonds, comparison of Tax Free Bonds with other investment options.
What Tax Free Bonds are expected in FY 2015-16?
In months of Aug, Sep the following Tax free Bonds will be available. The bonds will have tenures of 10, 15 and 20 years and the interest rates are to be decided with reference to the rates of government securities.At present, yield on the benchmark 10-year gilt is 7.781 per cent.
- The National Highways Authority of India will make the largest offering to the tune of Rs 24,000 crore
- The Indian Railway Finance Corporation can raise funds to the tune of Rs 6,000 crore
- The Housing and Urban Development Corporation – Rs 5,000 crore
- The Indian Renewable Energy Development Agency – Rs 2,000 crore
- NTPC – Rs 1,000 crore
- Rural Electrification Corporation – Rs 1,000 crore and
- Power Finance Corporation – Rs 1,000 crore
Power Finance Corporation (PFC) could be the first to hit the market,
What are the Tax Free Bonds?
Tax free bonds are those bonds issued for long term, for investment horizon of 10 to 15 years, in which interest earned is exempt from tax. Tax free bonds do not provide any benefit of tax savings but only interest earned on these bonds is tax exempt. Since there is no tax on interest earned, these bonds are touted as much more attractive than bank fixed deposits. Our article Understanding Tax Free Bonds discusses it in detail.
Why are Tax-Free Bonds Popular?
- Tax-Free Interest – Unlike fixed deposits (FDs), interest earned on these bonds is exempt from income tax for the investors. This is what makes these bonds highly popular among the tax paying retail investors and high net worth individuals (HNIs).
- Scope of Capital Appreciation – There is no scope of capital appreciation with bank fixed deposits or company deposits as such investments are not directly linked to interest rate movement in the bond markets. Unlike bank/company deposits, tax free bonds get listed on the stock exchanges and their market value goes up when there is a fall in the interest rates. Tax Free Bonds issued during FY 2013-14 with coupon rate of 8.75% to 9% have been trading at a premium of 15-25% apart from their regular interest payments.
- Liquidity – With tax-free bonds, you can only sell your bond holdings on the stock exchanges .
- Highest Credit Rating – These bonds get issued by the public sector enterprises most of which are AAA rated. So, from the safety point of view, these bonds are highly secured and attract a big number of risk-averse investors. To me, it makes perfect sense to invest in these bonds as against riskier company deposits.
Taxation of Tax Free Bonds?
The unique feature of the Tax Free bonds
- No Tax is saved when one invests in Tax Free Bonds
- Is no tax on interest earned. That is interest is tax free.
- This interest will be paid every year.
- No TDS on interest as interest is tax free.
- Interest earned has to be shown as exempt income while filing Income Tax Return ITR
- If sold within one year one has to pay Short term Capital Gain at the normal rate,
- If sold after one year one would have to pay long-term capital gains which are taxed at 10% without indexation and 20% with indexation. You can avoid long term capital gains by investing under section 54EC.
Interest Rate of Tax Free Bonds
An investor can earn interest rate ranging from 7.3% p.a. to 7.5% p.a. depending on the ratings assigned by a credit rating agency which are as follows. Higher the credit rating, less the interest.
- AAA Rated Issuer : National Highways Authority of India (NHAI) and Indian Railways Finance Corporation are AAA rated entities. will provide interest rate which is .55% lower than similar maturity G-Sec yields.
- AA+ Rated Issuer HUDCO is AA+ rated entity. It will provide interest rate which is .1% above the interest rate offered by AAA rated issuer or .45% lower than G-Sec yield.
- AA or AA(negative) Rated Issuer will provide interest rate which is .2% above the interest rate offered by AAA rated issuer or .35% lower than G-Sec yield. Currently none of the above permitted seven entities hold AA or AA- ratings.
History of the Tax Free Bonds
Tax Free Bonds were first issued in the financial year 2011-12 and raised Rs. 30,000 crore and subsequently in each following year but were absent in the last financial year i.e. 2014-15.
The funds raised through these bonds are usually invested in the infrastructure sectors which require funds for longer term as in comparison to any other sector.
| AY | Amount collected (in crore) | Interest Rate | Companies |
|---|---|---|---|
| 2011-12 | 30,000 | 9.6 – 10.5% | 6 PSUs:IRFC, NHAI HUDOC,L&T Infrastructure Finance,IFCI,LIC |
| 2012-13 | 60,000 | 8.00 – 9.25% | 5 PSUs:NHAI, PFC, IRFC, HUDCO and REC |
| 2013-14 | 50,000 | 7.32-8.01% | 9 PSU: PFC, IRFC, HUDCO, REC, IIFCL, Ennore Port, Dredging Corporation, NHB and JNPT |
| 2014-15 | – | – | – |
| 2015-16 | 40,000 | 6.6-7.13% | 7 PSUs: NHAI,IRFC,HUDCO,The Indian Renewable Energy Development Agency,NTPC,REC,PFC |
Comparison of Tax Free Bonds with other investment options like PPF, Fixed Deposit,Tax Saving FD
| Particulars | Tax Free Bonds | Tax Savings FD | PPF | FD |
|---|---|---|---|---|
| Deduction under section 80C | No | Yes | Yes | No |
| Time of Investment | When Issue Opens | Anytime | Anytime | Anytime |
| Interest Rate | Fixed at the Time of Investment | Fixed at the Time of Investment | Variate throughout the Tenure Duration | Fixed at the Time of Investment |
| Maturity | 10-20 | Years Minimum 5 years | Minimum 15 Years | Variable |
| Taxation on Return or Interest | Fully Exempted | Taxable | Fully Exempt | Taxable |
| Pre mature withdrawal | Yes | through Secondary Market Possible with penalty as well as by losing tax benefits | No Allowed | Yes |
How to buy New Tax Free Bonds in India?
You can subscribe to new tax free bonds when the Bond Issue is open for subscription. The issues will be open for few days only. The bonds can be bought in physical form or through your Demat account. The subscriber has to furnish Permanent Account Number (PAN) to the issuer of the Bonds.
In case, if you miss buying TFBs during the Public issue, you can still buy them from Secondary market through stock exchanges. But, they can be traded on the exchanges in Demat mode only.
Related Articles:
- Understanding Tax Free Bonds
- Tax Free Bonds of FY 2011-12, FY 2012-13
- Fixed Deposits and Tax
- Understanding Public Provident Fund, PPF
- Investing:Think about Liquidity,Safety,Returns,Risk,Tax
Tax free bonds locks money for long tenure at a competitive interest rate, they pay back interest every year , which is tax free, 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?
Few questions. Request your clarification :
(1) How easy is it to buy Tax Free Bonds in the secondary market? I have a demat account with a PD (HDFC) and would like to buy some tax free bonds. If I apply today through this demat account of HDFC, will I get the bonds in my account within a day like purchase of stocks?
(2)Is there a single place where GoI publishes the issue dates and other details of G-Secs in India? I am looking for something like a calendar that is published at the beginning of the fiscal year, maybe, where GoI publishes the tentative dates and details of the G-Secs (both Cental Govt. and State Govts.) to be issued over the course of the year. Please help.
Thank you.
I have purchased IRFC bonds of 2016 in Physical Form as I haven’t had Dmat. I received Physical copy of Bond allocation. Now, I have dmat.. Is it possible to convert Physical to dmat form. If yes, what is the procedure..
What are the upcoming TFBs?
What are the upcoming TFBs??
As of today, This FY there are no plans of Govt issuing tax free bonds. You can try buying tax free bonds issued earlier.
Check out today’s article in Economic Times Why this is the right time to buy tax-free bonds
If i was allotted Rs. 8 lakhs of tax free bonds during the issue in retail category (addl 0.25% interest) and later if i purchase 3 lakhs of same bond from secondary market, will the interest rate on my originally allotted bonds be also clubbed with HNI category as my total investment is more than 10 lakhs? Further, if so, Can I revert back to retail category If I sell one lakh of bonds?
can I purchase long term infrastructure saving bond to save tax for 2016-17 like 2015-16 i.e. clause 80ccf is applicable for 2016-17 or not
No Sir you can’t.
Section 80CCF of Income Tax was an addition in the Financial Year 2010-11, under which an investment of upto Rs 20,000 made in certain infrastructure bonds qualified for additional tax deduction.
Deduction under 80CCF was extended to 2011-12. However this exemption has not been extended from the FY 2012-13.
Individuals and HUFs can continue to make investments in theses bonds but you cannot claim income tax exemptions for your investments.
Which tax free bonds are now there for me to invest in this financial year can you please send me the details of the same.
any updates ? did anyone received these bonds in their demat account ?
please any updates. am getting quite worried now. do you know who to contact in case i dont get these bonds but money is deducted. i am buying these bonds for the first time…
apologies. got the tax free bonds in my demat account. happy. can any one tell me when the next tax free bonds for nri’s will be available?
of course, all ways on time without any default
When is the next issue which NRI can apply for.
did any one get these IRFC bonds in their demat accounts ?
Refund/Basis of Allotment would get initiated by 23rd, but actual allotment should happen by March 28th.
You can check Allotment Status through http://kosmic.karvy.com:81/ipotrack/
Please let us know if there are any more tax free bonds for NRI’s coming up ? also can NRI’s buy these tax free bonds from the secondary market ? this is not clear and not stated anywhere. when we buy from the secondary market , i think the interest rate gets reset to the lower rate at which the HNI get these bonds…is this correct ?
When will irfc bonds be seen in my demat ?
You should be getting soon.
The tax-free bond issue of Indian Railway Finance Corporation subscribed 5.04 times.
The bids were received for 2521574 bonds as compared with 50,00,000 bonds on the block.
With effect from Monday, March 21, 2016 under mentioned new securities issued on private placement basis Indian Railway Finance Corporation are admitted to dealing on the Exchange in the list of securities of F GROUP – DEBT INSTRUMENTS
I have applied in retail nre category for the irfc bonds issue which opened on march 10. I have still not got any allotment or any refund. When will either come? I applied on first day at 10am. So I should be getting @100% right?
Let me know. Am worried.
Category 3 investors, who include HNIs and Hindu undivided families, bid for 1.42 times the quota limit. The retail quota was subscribed 0.37 times. So you might not get full allotment. Do keep us updated
Don’t worry, you will get it a week.
For AY2015-16 can I subscribe to taxfree bond now & claim deduction in ITax?
Hi
Are we having any more TFB issues this fiscal after the current NABARD and IRFC?
How long it takes for NHAI confirmation of allotment from date of amount debit.
I want to know about IRCA, like if I invest in this TFBs then please let me know if I will be able to sell them when I require money or not.
Please let me know if I cannot sell them before 10 years.
As these bonds would be listed on Stock Exchange you can sell it on exchange.
If sold within one year one has to pay Short term Capital Gain at the normal rate,
If sold after one year one would have to pay long-term capital gains which are taxed at 10% without indexation and 20% with indexation. You can avoid long term capital gains by investing under section 54EC.
where can i get the bonds for the SBI issues , i dont have demat account
Can you list the Upcoming Tax Free Bonds And their Issue date …
National Bank for Agriculture and Rural Development (Nabard) and Indian Railways Finance Corporation (IRFC) are expected to bring two more tax free bond sales before the financial year ends on March 30. We shall update as soon as we get the information.
National Bank for Agriculture and Rural Development (Nabard) and Indian Railways Finance Corporation (IRFC) are expected to bring two more tax free bond sales before the financial year ends on March 30. We shall update as soon as we get the information.
areThis Tax Free bond applicable benefit of 80c of Income tax !
tax free bonds are gobbled like chocolates this year,eg IRDA. preclosure due to over subscription.
Stock market/gold/debt are all not doing well so people especially HNI are investing in these tax free bonds
need tax free bonds
Sorry didn’t understand the question. Could you expand
Did any one in retail for IRFC bonds which opened on 10th march get a refund ? Or did u get bonds in your demat account ?