NHAI Bonds: Rs. 20,000 tax deduction?!?!?

NHAI bonds are in limelight since the time they have announced the issue and the rate of 8.20% p.a. and 8.30% p.a. for 10 years and 15 years respectively.  Today various newspapers have quoted that the HNI and Qualified Institutional Investors (QIIs) portion has already been oversubscribed.  Business Standard states that retail portion (those investing less than or equal to Rs. 5 Lakhs) is subscribed by 1/3^rd including green shoe option by end of Day 1.  Thus it can be seen that the response to the issue is overwhelming.

However, in all these buzz and excitement, retail investors are mis-sold to invest in these bonds.  Last week I got following sms from my dedicated relationship manager of one of the largest private bank in India with whom I have savings account relationship:

“NHAI Infra Bonds collection begins from 28^th December.  Kindly inform all your friends and colleagues who have missed an opportunity to invest in IDFC and L&T Bonds and save tax of Rs. 20,000.  Regards XYZ”

Now this is blatant mis-selling.  These bonds are different from those offered by IDFC or L&T and are not eligible for Rs. 20,000 benefit under Section 80CCF of the Income Tax Act.

Only the interest income earned on these bonds is tax free.  There is no separate tax benefits associated with these bonds.

When I replied back to her stating that her sms is factually incorrect, she responded back saying that this is what has been communicated to us by our seniors.!!!!  I told her to recheck with her seniors and rectify the misleading communication, which she agreed to do and confirmed the error later.

All the best to all who makes their investments based on advice of such relationship managers!!!

About NHAI Bonds in brief:

These bonds are issued by National Highways Authority of India (NHAI), which is an autonomous body under the Ministry of Road Transport & Highways, Government of India.  The bonds are secured and are available for tenure of 10 and 15 years.  Rate of interest for 10 years is 8.20% p.a. and for 15 years is 8.30% p.a. 

Interest is payable annually and is not cumulative.  Interest income is not taxable in the hands on the investor. 

The bonds shall be listed on both NSE and BSE and can be sold any time subsequent to the listing.  However any gain made by selling the bonds shall be taxable as per the applicable capital gain tax rates for bonds.  There is no call or put option available.

The issue size of Rs. 5000 crores with an additional Rs. 5000 crores as greenshoe option has been divided into 3 categories:

Categories	Investors	Issue Size
Category 1	Qualified Institutional Investors	40% of the Issue Size
Category 2	HNIs (Retail investors applying for amount > Rs. 5 Lakhs)	30% of the Issue Size
Category 3	Retail Investors applying for amount ≤ Rs. 5 Lakhs	30% of the Issue Size

Minimum investment is Rs. 50,000.  Allotment for Category 1 and Category 2 shall be on the first come first serve basis, whereas, allotment for Category 3 (Retail Investors) shall be on proportionate basis.

The issue opened yesterday (28^th December 2011) and closes on 11^th January 2012.  However NHAI has the right, based on response received, to close the issue before 11^th January 2012.