PFC Tax Free Bonds – Feb 2013 – Review

There have been series of Tax free bonds in last two months from likes of HUDCO, IIFCL, REC and IRFC. Now PFC (Power Finance Corporation) has come out again with its Tax free bonds which would be open for subscription till March 15, 2013.

PFC Tax Free Bonds – Significant Points:

  • Offer Period: February 18 – March 15, 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 PFC tax free bonds.
  • Rating: ‘[ICRA] AAA’ by ICRA, ‘CRISIL AAA /Stable’ by CRISIL and ‘CARE AAA’ by CARE
  • Allotment: First Come First Serve
  • Listing: Bonds would be listed onBSE 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?

  1. The bonds are secured to the full extent and have the safest credit rating (AAA)
  2. The interest rates on future tax free bonds might be lower as RBI might moderate its policy rates further
  3. Reduction in interest rates would means an increase in the price of bonds thus giving capital gains

Why you should not invest?

  1. 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
  2. If you are not in higher tax slab of 20% or more
  3. 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

PFC 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 PFC’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.

Also Read: How investing in Tax free Bonds in your Wife’s name can save tax?

About PFC:

Power Finance Corporation is a listed Government of India undertaking with 73.72% stake held by the govt. The company provides financing to state electricity boards (SEBs), state generating companies and independent power producers (IPPs) for a range of power-sector activities including generation and distribution.

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