India Infrastructure Finance Company (IIFCL) has come out with it’s issue of tax free bonds for this year. Earlier, we have had tax free bonds from REC (Rural Electrification Corporation) and Power Finance Corporation (PFC) and now IIFCL has followed suit.
Let us quickly check on the details of IIFCL tax free bonds 2103 and whether you should buy them or not.
Details of IIFCL tax free bonds 2013
The issue opened on December 26th 2012 and will close on January 11th 2013.
The total issue size is Rs 1,500 crore with a greenshoe option of retaining Rs 9,215 crore. The issue has been rated AAA/Stable by ICRA, CARE and Brickworks.
IIFCL issue has 3 bond series – one with a 10 year tenure, the second with a 15 year tenure and the third with a 20 year tenure. These rates are applicable for those who buy the bond through the issue that is open, for those that buy after listing, the interest rate will be 0.50% lower.
The face value of each series is Rs 1,000 and the minimum investment amount is Rs 5,000. There is no limit on the maximum amount of money you can invest in IIFCL tax free bonds 2013.
The coupon rate for these three series is shown in the chart below.
|Series 1||Series 2||Series 3|
|Tenure||10 yrs||20 yrs||30 yrs|
|Minimum Investment Amount||Rs 5,000||Rs 5,000||Rs 5,000|
|Face Value||Rs 1,000||Rs 1,000||Rs 1,000|
After you buy from the primary market, these will be listed on the NSE and BSE and you can then trade in them. Since there is no lock in period, you can sell it immediately after listing. However, you need to be aware of long term capital gains that you might have to pay – 20% with indexation and 10% without indexation. The bonds are available in both DEMAT form and physical form.
The interest rate on all tax free bonds are tax free and there is no wealth tax on them as well. These are different from tax-saving bonds in which the invested amount is allowed for deduction from the total taxable income – note that the government has discontinued tax saving bonds from this financial year. In case of tax-free bonds, the interest earned on the invested amount is exempted from income tax.
Should you buy IIFCL tax free bonds 2013
Well if you are in the higher tax bracket, the bonds might make sense if you are looking to invest your money in fixed income instruments. Being in the higher tax bracket, the money that you put in (say) a fixed deposit will be taxed as per the income tax slab you are in.
With the current interests on fixed deposits, you are going to get around 5% – 6% post tax on your investment.However, these bonds will offer you around 8% which is much better than the fixed deposit route.
It is therefore correct to infer that these bonds are ideally for those who are in the higher tax bracket. Documented below is the pre-tax rate of return on these bonds which, as you can see, is very good. Do look at the post tax returns to compare your investments.
|Series 1||Series 2||Series 3|
|Pre tax return in 30% tax bracket||10.99%||11.23%||11.29%|
Note that there are 3 series of bonds that are available and the higher tenure you take, the more interest rate risk you carry as over a long period of time, the rates can go anywhere. Hence, it might be wise to stick to the 10 year tenure, however that is a decision which you need to make on a case to case basis and not blindly on what you are reading here.
Last year, investors fell over each other to lay their hands on tax free bonds. As a result, the issues closed much earlier. This year, bonds issued earlier by Power Finance Corporation (PFC) found few takers even though they were rated AAA by Crisil and ICRA and as such PFC had to extend it’s deadline by a week. It would be interesting to note whether IIFCL tax free bonds 2013 meet the same fate or whether investors gobble up the offering as these are available at a time when retail investors make investments for tax saving purposes.