There have been series of Tax free bonds in last two months from likes of HUDCO, IIFCL, REC, PFC and IRFC. PFC had come out with its Tranche- II of Tax Free Bonds and now IRFC (Indian Railway Finance Corporation) too has come out with tranche – II of Tax free bonds which would be open for subscription between February 25 till March 13, 2013.
IRFC Tax Free Bonds – Significant Points:
- Offer Period: February 25 – March 13, 2013 (the offer can be pre-closed on full subscription)
- Annual Interest Rates for Retail Investors:
- 7.38% for 10 Years
- 7.54% for 15 Years
- The interest rates are 0.5% less for HNIs, QIBs and corporate subscribers.
- Price of each bond: Rs 1,000
- Minimum Investment: 5 Bonds (Rs 5,000)
- Max Investment Limit for Retail Investor: Rs 10 Lakhs
- Reservation: 40% reserved for retail investors
- NRIs can invest: NRIs can invest as retail investors or in the other category for the IRFC tax free bonds.
- Rating: ‘CARE AAA’ by CARE
- Allotment: First Come First Serve
- Listing: Bonds would be listed on BSE and will entail capital gains tax on exit through secondary market
- You can apply for these bonds in the Demat or the physical format, but for trading you need to have them in the Dematerialized format.
- Step Down Clause: The bonds will come with a step-down clause, according to which only the original allottee, who has subscribed under the retail category will receive the coupon of 7.38% – 7.54% depending on tenure. On sale or transfer, the benefit is lost and rates reduce to that applicable for other investors (6.88% for 10-year bonds and 7.04% for 15-year bonds).
Why you should invest?
- The bonds are secured to the full extent and have the safest credit rating (AAA)
- The interest rates on future tax free bonds might be lower as RBI might moderate its policy rates further
- Reduction in interest rates would means an increase in the price of bonds thus giving capital gains
- There are also speculation about lesser numbers of tax free bonds would be issued next year post this budget.
Why you should not invest?
- The interest rate offered by PPF is 8.8% tax free. You should exhaust your maximum PPF limit of Rs. 1 Lakh before you look for tax free bonds
- If you are not in higher tax slab of 20% or more
- These bonds don’t make much sense for NRIs as they can get better returns on NRE fixed deposits with banks that offer rates of around 9 per cent, tax-free
IRFC Tax Free Bonds – Who should apply?
As for most tax free bonds, these are good for investors in high income tax bracket of 20% and 30%. Today the maximum rate offered by bank fixed deposit is 9%. This translates into a post tax return of 7.2% for 20% tax slab and 6.2% for 30% tax slab. This is lower than IRFC’s 10-year and 15-year tax free bonds.
Along with the above, it suits investors who want regular income from interest payment and have low risk profile.
IRFC, fully owned by the Government, finances the acquisition of rolling stock such as locomotives, coaches and wagons ordered by the Ministry of Railways (MoR). The MoR and its related entities are IRFC’s sole clients.
The company leases out the rolling stock to the Indian Railways for long periods on a cost plus margin basis. This helps it earn steady net interest margin of around 0.5 per cent. As on September 2012, IRFC’s long term loans and advances was Rs 59,778 crore, up from Rs 25,301 crore in March 2008.
Government support means that the company has low financial risk. It had zero non performing assets as of September 2012. The company posted a profit of Rs 481 crore during FY-12 and Rs 299 crore for the six months ended September 2012.