Tax Free Bonds seem the flavour of the season, especially when we see the Day 1 subscription figures for IRFC Tax Free Bonds issue which opened on 8th December, 2015. The issue got applications for bonds for Rs. 10700+ crores on Day 1 itself while the issue size combined with green shoe option was Rs. 4,532 crores. The issue was supposed to be open for 14 days and scheduled to close on 21st December but as the allotment is on first-come first serve basis, it makes no sense applying for the same. As per the recent report in The Economic Times, this issue also attracted fancies of the film stars with a string of big names opting for the tax-savvy investment option. Aamir Khan, Akshay Kumar and the Kapoor sisters Kareena and Karishma are among the Bollywood stars which have reportedly opened up their wallets to these bonds.
However, if you just feel left out after not applying for IRFC Tax free bonds or even the earlier issues, National Highways Authority of India (NHAI) is launching its big Tax Free Bonds issue for Rs. 10,000 crores from 17th December, 2015. But with the kind of subscription we have seen for IRFC bond issue, even this issue might get oversubscribed first day itself. The Day 1 oversubscription theory gets more weight from the fact that NHAI issue offers better rates than IRFC bonds for the similar tenor.
Salient Features of NHAI Public Issue
- The issue shall open on 17th December, 2015 and scheduled to close on 31st December, 2015.
- NHAI is an AAA rated entity denoting the highest grade of security in payment of principal and interest and thus, lowest default risk.
- Unlike other issues which have hit the market so far, NHAI is offering only 10 year and 15 year bonds to the investors. Earlier issues by other companies also had 20 year bonds on the offer.
- For a 10 year bond, the issue offers 7.39% p.a. to the retail investors while for 15-year tenor, bonds shall carry 7.60% p.a. interest for the retail investors. For other category of investors, the interest rates shall be 0.25% lower.
- NHAI shall pay interest on application money at the rate equal to the bonds allotted while for the application money being refunded, interest shall be paid @ 5%.
- Minimum amount to be invested in the issue is Rs, 5000 and maximum amount which shall allow an investor to retain the ‘retail investor’ category is Rs. 10 lakhs.
- To ensure liquidity, the bonds shall be listed on BSE and NSE. While the allotment will be available in both demat and physical mode, however, trading will take place only in demat mode.
The tax-free bonds seem to be an attractive option for the retail investors as it allows locking a fixed return over a longer duration. Since the earnings in the form of annual interest are tax-free, post-tax yields for the investor would be close to 11%. Also, since the news of decrease in small savings rates by the Govt. of India is doing rounds, the bonds are expected to be grabbed happily. Tax free bonds offer one of the best options in the debt category presently and perhaps the only one with no caveats. The other options leaving tax free bonds behind in respect of the annual returns are Public Provident Fund (PPF) and Sukanya Samriddhi Account, but these accounts come with their own restrictions and also floating returns linked with yields on Govt. securities.
Further, since the bonds shall be listed, investors can also earn capital gains on tax-free bonds if the bond prices move upwards. And since the interest rate trajectory is headed south, the bond prices being inversely related shall head north. Therefore, there is a hidden opportunity for capital gains on these bonds as well.
Hence, it is suggested that the issue offering 7%+ tax free returns is certainly worthy of consideration to invest, but don’t forget the date or you might miss the wagon Once Again.