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.
| Specifics | |||
| Series 1 | Series 2 | Series 3 | |
| Tenure | 10 yrs | 20 yrs | 30 yrs |
| Coupon rate | 7.69% | 7.86% | 7.90% |
| 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.
| Specifics | |||
| Series 1 | Series 2 | Series 3 | |
| Coupon rate | 7.69% | 7.86% | 7.90% |
| 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.
Dear Radhey,
I think it is high time someone did a review of such bonds to clearly explain to the investor who should invest and more importantly who should not. Being in the highest tax bracket is a weak reason. Many bloggers compare these products to FDs which is like stating the obvious. Obviously these are better.
Many who facilitate the purchase of these bonds agree that investors are attracted only the tax-free nature of these returns.
Being long-term investments once must go for these only if a debt component is missing in the portfolio that too with the cumulative option.
Even if one wants to sell in it after a couple of years they may serve as decent short-term debt instruments (one may want to sell but isn’t this possible only if someone agrees to buy? Is that a guarantee?)
If one has a large lump sum available and free to use for a particular goal then it makes sense to invest all or most of it in these depending on the need and time of the goal.
Choosing the yearly interest option makes sense for a retiree or for someone who needs the money for a specific goal each year.
Some “financial experts” advice to reinvest the yearly interest in equities for ‘capital appreciation’. Might as invest it in equities in the first place!
They maybe apples and oranges but considering the long nature of these investments I think investor should compare these with equity investing and make a call depending on the goal and current state of the portfolio.
It is disappointing that none of the bloggers focus on the aspect of suitability of this product while reviewing it. I think this contributes to considerable confusion among investors.
Pattu – Why so serious ?
Looks like you know a lot and hence your expectation was more. For a newbie, the article could be providing a lot of information. I suggest that whatever pieces you find missing, you shoudl write awesome article out of it and send it to me for publishing. I will post it with due credit and all readers will get ample opportunity to learn from your expertise. What say ?
Dear Radhey,
My anger is not directed at you in particular. Of course the beginner will find this useful and you are right I should think about that more often.
I think when there is a new investment option available bloggers sometimes don’t provide enough wider perspective perhaps because a majority of investors would find it overwhelming (guest posts by ‘bond peddlers’ contribute to this to a great extent). Unfortunately what happens is this perspective gets lost in time and bad decisions get made.
You can do a far far better job of writing about this angle because you know how investors behave better. All I did was think about whether this product is suitable for me or not. Sorry to say this but many are simply too lazy to do this in a rational manner and make random decisions on scraps of knowledge. All the more reason why you should write about:’who should invest and who should not’
A single infographic from you could make a big difference.
ps. Thanks for taking this in the right way. A popular blogger did not and thought I was questioning his integrity! Although we sort of patched up later, one year on, the perspective is still missing.
Pattu, I always take your and other readers comments in the right spirit and it provides a new dimensions and perspective to look at things.
I will try to do better and hope you keep contributing via the comments section, if not through enlightening articles, more often.
You will be amazed but the maximum readers want to read only basic articles and not advanced and my focus is on them. Being a side business for me (as it is for you mate), my research and depth is limited to the time I get for it.
I will try to do better – keep coming back and commenting, it helps.
Yes you are right. I am learning everyday about how to keep things simple to cater to a wider audience.
For retail investors, its better to AVOID INVESTING in IIFCL bonds.
The coupon rate of 7.9% may not beat inflation rate in the long term. You will not be able to use the power of compounding as well. In fact debt mutual funds can do a better job for you. For retirees this may look a reasonably decent option in case they have exhausted the limits of senior citizen saving schemes.
http://www.newsanalysis.fintotal.com/India-Infrastructure-Finance-Company-Ltd-IIFCL-Tax-free-bonds-December-2012-What-is-it-all-about/3954“
Dear Sirs,
Please let me now the maturity value of one Rs 1000 Bond for the 3 options i.e. 10 years, 15 years & 20 years.
Regards
The interest on these bonds will be paid annually on a fixed date. There is no cumulative option. As Interest earned would be tax free, hence the name Tax Free bonds. So if invest 10,000 Rs in these bonds you would get interest at the coupon rate 7.69% i.e 7.69 * 10,000 = 769 Rs every year. On maturity he will get back his 10,000 Rs.
These bonds do not use the magic of compounding!
More details about the bonds can be found at Tax free bonds
Thanks for your reply.
Thanks for the Reply and clearing my doubt. Compounding is always better, It is rather difficult and not practical to keep reinvesting the Annual Interest recd.