NHAI and PFC Tax Free Bonds

With Season’s Greetings the season for Tax Free Bonds has also started with announcements from NHAI (National Highway Authority of India) & PFC (Power Finance Corporation of India) – both companies are opening there issues on 28th December 2011. But this is just a starting as you will also see other PSUs lining up there tax free bonds including HUDCO & Indian Railway Finance Corporation.

If I am not wrong in 2003 RBI was offering tax free bonds in name of RBI Relief Bonds – last rate was 6.5% tax free. HNIs were crazy about these bonds & now queue will be long as current bonds have limits. These bonds are tax free, secured, redeemable & non convertible.

Interest Rates on NHAI & PFC tax free bonds

According to guidelines, coupon rates on tax-free bonds should not be more than G Sec yield less 50 bps for bonds issue through public issue. So NHAI & PFC both opened full throttle – 8.2% for 10 year bonds & 8.3% for 15 year bonds. Interest is payable annually. {PFC Bond information is based on Business Bhaskar}

nhai pfc tax free bonds NHAI and PFC Tax Free Bonds Effective yields in NHAI & PFC bonds

10 Years 15 Years
Tax Rate

8.20%

8.30%

10.30%

9.14%

9.25%

20.60%

10.33%

10.45%

30.90%

11.87%

12.01%

Note for Future Issues: As rates on these bonds depend on G Sec yields – you may expect a lower or higher rate depending on G Sec future Yields. If these bonds were launched in November 2011 – highest possible yields were 8.43% & 8.53% as G sec yields were close to 9% at that time.

What Tax Free means?

  • The income by way of interest on these Bonds is fully exempt from Income Tax and shall not form part of Total Income.
  • There will be no deduction of tax at source (TDS) from the interest, which accrues to the bondholders in these bonds irrespective of the amount of interest or the status of the investors.
  • Wealth tax will not be applicable on these bonds.

Note: If you redeem these bonds through exchange before maturity – there can be capital gain tax or capital loss depending on your sale price.

Changes in tax benefits after DTC

Hopefully the above mentioned tax benefits will continue but would like to add a point which is mentioned in both prospectuses.

The Hon‘ble Finance Minister has presented the Direct Tax Code Bill, 2010 (DTC Bill‘) on August 30, 2010, which is proposed to be effective from April 1, 2012. The DTC Bill is likely to be presented before the Indian Parliament thereafter. Accordingly, it is currently unclear what effect the Direct Tax Code would have on the investors.

Tax Free bonds issue dates

  • Opening – Both the bonds will open on 28th Dec 2011
  • Closing – NHAI will close on 11th Jan 2012 & PFC on 16th Jan 2012

In both the case issues can be closed earlier (minimum 3 days).

Allotment Basis of tax free bonds

In NHAI bonds it is first come first serve basis for HNI & institutions but for retail it is on pro-rata basis. In PFC bonds allotment is on basis of first come first serve basis but last days applications will be treated as equal – bonds will be based on pro-rata basis. These bonds can be applied in both demat & physical form.

Credit Rating

Both NHAI & PFC Bond issues have got highest credit rating from ICRA & Care – that is AAA.

Issue Size

  • NHAI Bonds – Rs 5000 Crores with option to retain oversubscription upto Rs 10000 Crores
  • PFC Bonds – Rs 4033 Crores

30% of the base issue size is kept for retail clients. (Where application size is less than Rs 5 Lakh)

Minimum Application Size

In case of retail investors it is Rs 50000 & thereafter in multiples of Rs 1000.

Tax Free Bonds – Frequently Asked Questions

These FAQs are taken from RR Finance – who is lead manager in PFC issue. I have made some changes based my glance through prospectus of NHAI & PFC.

Where the bonds would be traded?  Whether in BSE and NSE or WDM?

NHAI bonds are proposed to be listed on both BSE and NSE. The trading can happen only in Demat form. PFC bonds will be listed on BSE only.

Who Can Apply

  • Individuals and HUFs
  • NRIs (both on repatriable & non-repatriable basis)
  • Corporate
  • FIIs
  • Financial Institutions, Mutual Funds, Pension funds,
  • Partnership firms & Limited liability partnerships
  • Insurance Companies

Is the coupon fixed through-out the tenure?

Yes, the coupon will be constant and will be paid annually during the full tenure of 10/15 years.

Is there a lock in period in the issue?

The issuer will redeem the bonds only at the maturity and there are no buy back options. The investor however need not hold the bonds for any minimum tenure to avail the tax benefit. The bonds can be purchased or sold on exchanges any time at the prevailing prices.

What will be the tenure of the Bonds?

Choice of 10 years and 15 years will be there

Is Demat account Mandatory to invest in tax free bonds?

The bonds can be allotted either in Demat or Physical form. However, they can be traded in exchange only in Demat mode.

Will TDS be deducted from the interest payment?

Bonds are Tax free and not subject to TDS

Will there be the interest on application money?

Yes.  The interest will be decided by the issuer at a later date. Usually it is equivalent to the coupon but it depends from issuer to issuer

Will two applications from a single investor be accepted?

Multiple applications are allowed

Whether PAN Card is mandatory? What if the applicant, who is an assessee holds, only a letter from the IT Department (procedure in olden days) indicating the PAN?

The investor must have a PAN to apply for these bonds.

In case of application for securities in demat form, no PAN copy has to be attached. A self attested copy of PAN card of the investor is required to be attached to form when bonds are applied in physical form.

Is the interest on these bonds paid out periodically or is there a compounding option in the bonds?

The interest on these bonds will be paid annually (for example 31st March every year) by credit into the account of the investor. There is no cumulative option.

What is the tax treatment of different flows from the bonds?

Please note that the sum invested in these bonds is not eligible for any deduction under section 80C, 80CCF or 54EC. The interest on these bonds is tax free. Thus no income tax would be required to be paid, nor will it be subject to TDS. However, capital gains on these bonds are taxable like normal corporate bonds.

If the bonds are sold within one year of the date of purchase, the short term capital gains arising would be subject to tax at slab rates. For sale after a holding period of one year, the long term capital gains will be taxable at 10% without any indexation benefit.

Whether the capital gains, if any, could be re-invested in any other instrument for avoidance of such tax?

Any capital gains arising on sale of assets can be set off by investment in eligible assets as the prevailing rules of the government.

Whether investments can be made by individuals jointly on “Either or Survivor” or “Anyone or Survivor” basis?

The application on bonds can be made on single or joint basis. Where two or more persons are holders of any Bond (s), they shall be deemed to hold the same as joint holders with benefits of survivorship subject to applicable laws. Where Bonds are held in joint names and one of the joint holders dies, the survivor(s) will be recognized as the Bondholder(s) in accordance with the applicable laws.

Whether an applicant applying in the first day of opening of the issue is assured of allotment? This is a very important question, especially from the HNIs.

The issue will remain open for at least 3 days. If the issue is over subscribed within this period, the applicants will receive allotment on pro rata basis. Thus investors who have applied during this period will receive at least some allotment. If issue extends beyond 3 days, the applicant in first 3 days will receive full allotment.

Disclaimer: I can’t take any guarantee that above mentioned information is 100% correct. Read the prospectus before investing in these bonds.

If you have any questions regarding these bonds – feel free to ask.

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{ 30 comments… add one }

  • Balaji December 27, 2011, 12:29 PM

    is it one time investment or do i need to investment the same amount every year upto( say 10 or 15 years)?

  • Abhishek December 27, 2011, 1:05 PM

    Hemant,
    is it advisible to put in these Bonds? i have a plan to put in PPF, will it be wise if i reduce the ppf amount and put it to these bonds instead?
    Thanks in Advance
    Abhishek

    • Hemant Beniwal December 27, 2011, 1:35 PM

      Hi Abhishek,
      Investment in PPF should be done if tax saving u/s 80C is the purpose. In other case these bonds can be considered for long term debt investments.

    • Rajesh Kumar November 6, 2012, 11:09 AM

      First save up to 100,000 limit of PPF and then think about these bonds. These bonds do not qualify fot 80C.

  • Vidya December 27, 2011, 3:13 PM

    Dear author, I do not think calculating effective yields on the annual payput of 8.2% and 8.3% is correct. For one, there is no tax deduction like the case with 80C or 80CCF investments. Two, the interest is paid out every year and only the principal is paid out. Instead what you need to to do is compare this with the yield net of tax on other instruments. For instance a 9% bank deposit will yiled lower returns of 6.3% post tax (30% tax bracket) compared with NHAI bond.

    • Hemant Beniwal December 28, 2011, 7:11 PM

      Hi Vidya,
      Thanks for mentioning this. You are right – if we look at the figures on one year basis, effective yield is right but not on 10-15 year horizon.

  • Manoj Kumar December 27, 2011, 6:00 PM

    Hi,
    Can the bond taken initially in Physical form be later converted to demat form ?
    -tks

  • Ayush Kumar Jain December 27, 2011, 6:35 PM

    While the interest rate is good and interest earned is tax-free, since it is paid annually it is actually not that attractive. The compounding effect is missing, and so, return is nearly same as another investment which would give 6% compounded annually and tax-free.

    Definitely inferior to PF/PPF, atleast based on their current interest rates.

    Considering bank deposits, SBI currently offers 9.25% for 10-yr FDs. Even for someone at 30% tax slab, that comes to approx 6-6.5% after tax. Since these compound on a quarterly basis, final return will be higher. Also, it says here tax status after DTC is unknown for these bonds.

    So given all this, why invest in these bonds ?

    • Mansoor December 27, 2011, 9:24 PM

      I sort of agree with you Ayush. The annual payout makes it simple interest, where your base amount stays constant, thus defying the power of compounding. Nice observation, more like contrarian :-).

    • Hemant Beniwal December 28, 2011, 7:15 PM

      Hi Ayush/Mansoor,
      You are absolutely right – I have written a new article where I have shown comparison between SBI FD & Tax Free Bonds. Difference is negligible. Check this
      Does it make much sense to invest in tax free bonds?
      http://www.tflguide.com/2011/12/pfc-tax-free-bonds.html

  • amita lavania December 28, 2011, 10:00 AM

    ThanxHEMANT JI
    useful advice
    Amita

  • SABARISH December 28, 2011, 8:04 PM

    i would like to know whether these bonds can be pledged in future to avail loan

  • Anoop Singhal December 29, 2011, 11:04 AM

    I understand the effective returns (11.87 and 12.01) displayed in the Economic Times article are not correct.

    I have tried to calculate by taking yearly repayments of 8.2%*(1+tax rate) for 20% and 30% brackets but even that does not give the returns from ET. Also as these do not have 80C benefits the above method is not correct. Then how is ET calculating these retuns?

  • amardeep chadha December 30, 2011, 11:43 AM

    ET Calculations are base on 30.9 % tax levied on HNI’s.

    8.20 % works out to be 8.20 %*(100-30.9) = 11.87 %
    8.30 % works out to be 8.30 % *(100-30.9) = 12.01 %.

    The only bonds with ‘AAA’ rating which are listed are SBI (15yr) 9.95 % bonds . SBI Bonds were issued in March 2011 @ 10000 per bond. Current Value of 11100 works to 9.45% YTM (Yield to maturity) . The above yield is subject to tax. Taxable yield works to 6.53 %. NHAI and PFC are coming at 8.3%. the difference in taxable yield is 1.77%. Were the NHAI & PFC to list at the same yield (which they would after one month of adjustment) as SBI, they will have to quote @ 15 % premium. GO ahead and subscribe.
    Further theses bonds give you an opportunity to plan the falling interest regime. Ideally hold for a period of 2-3 years to make the most out of these bonds.

  • Sunil Sharma December 30, 2011, 6:41 PM

    It appears liquidity is the key. Will these bonds list on stock exchanges immediately. If so they are a very good option as the interest rates will start reducing from Jan 2012. Even if they are listed, is there enough demand for such assets on the stock exchanges.

  • SATISH CHANDRA AGARWALA January 11, 2012, 10:37 AM

    Can you appraise me of the status of allotment of NHAI & PFC tax free bonds for all the three catagories.

    Regards,

    Satish Agarwala

  • Swapnil Shinde January 11, 2012, 10:56 AM

    Sir my question is are these bonds really good to include in a reitred person’s portfolio which only includes FDs?

  • Ravinder Kumar Garg January 16, 2012, 3:14 PM

    I will sold one property in the month of March 2012 . Can I purchase NHAI Bond from open market to save long term capital gain u/s 54 EC.
    In future NHAI OR PFC Bonds market value can be increase or decrease for trading purpose ?

  • Rakesh Bansal January 17, 2012, 1:28 PM

    Tax free bonds ke against loan le sakte hai kya ?

    Thanks & Regards
    Rakesh bansal

  • Rakesh Bansal January 17, 2012, 1:30 PM

    Agar loan le sakte hai to, what is the procedure & what is the rete of intrest ?

  • Nagesh A February 26, 2012, 11:38 PM

    Is the application interest paid till date of allotment taxable?

  • Nidhi March 2, 2012, 5:13 PM

    there is some confusion about the interest on these bonds… ur article says 8.2% while the NHAI website says 6%, pls advice

    • Hemant Beniwal March 5, 2012, 8:43 AM

      Hi Nidhi,
      You are talking about 54 EC bonds which are for saving capital gains.

      • mumaj August 3, 2012, 2:56 PM

        if we hold bond in 6 month then we have receive interest or not

  • Kanthimathi March 22, 2012, 12:04 PM

    I have invested in PFC bonds – long term infra bonds u/s80CCF 2011, which has a lock in for five years. If for some reason, I do not want to hold these bonds (because I have joined an equity research firm and holding these bonds could potentially create a conflict), can I surrender these bonds to PFC stating that I do NOT need the money, by signing an indemnity etc. Also I can pay the taxes for the last assessment year.
    Please suggest some way of exiting even at the cost of losing the investment

    • Deepak May 10, 2012, 3:01 PM

      I do not thinks its a conflict as you have bought it before joining the equity research firm. max you need to do is give a declaration/disclamier to your companey HR and inform that you are holding these bond.

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