PFC Tax Free Bonds

After NHAI, it is now Power Finance Corporation Limited (PFC) which has come out with similar tax free bonds where the interest earned on the bonds are tax exempt for the entire tenure of the bond.

The rates offered on the bonds are same as one available on the NHAI Bonds, i.e. 8.2% for the bond tenure of 10 years and 8.3% for the tenure of 15 years.  These bonds are also secured and carry a similar rating by credit agencies.

The issue size is Rs. 1000 crores with an option to retain an oversubscription upto Rs. 4033 crores.  The issue has opened on December 30, 2011 and shall close on January 16, 2012.  However, as in NHAI, PFC has a right to close the issue earlier than the schedule date based on the response received.

The minimum application size in PFC is Rs. 10,000.  Thus the retail investors who felt Rs. 50,000 minimum subscription amount a tad too high in NHAI, can go for PFC Bond Issue.

While the investor categories remain the same as in NHAI, the allocation of the issue is slightly different between the 3 categories.  Moreover, for all the categories of investors (including retail investors), the allotment is on first come first serve basis.  In NHAI, for retail investors, the allotment was proportionate.

Categories	Investors	Issue Size
Category 1	Qualified Institutional Investors	50% of the Issue Size
Category 2	HNIs (Retail investors applying for amount > Rs. 5 Lakhs)	25% of the Issue Size
Category 3	Retail Investors applying for amount ≤ Rs. 5 Lakhs	25% of the Issue Size

Thus those who have missed the NHAI bus and want to hop in PFC Tax Free Bonds should do it at the earliest.  But remember they are tax free bonds and not tax savings bonds !!

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. 

Survey Results - How do individuals plan their tax related investments?

Every individual, whether salaried or in business, tries to ensure that his tax outgo is at the minimum.  Tax-related investments such as Provident Fund, Equity Linked Saving Schemes, etc form major avenues of saving taxes.  Each year, in the months of February and March, insurance and mutual fund companies heavily advertise their products to lure the last minute rush by individuals to save their tax.  New tax-saving products are launched by these companies to cash in the tax fever.

Whether the insurance and mutual fund companies benefit by launching their products in the last quarter of the year?  How do tax payers plan their tax related investments?  Do they plan their investments early or they rush for investments during the year-end?  Which is the favourite instrument of tax saving for individuals?

Bachhat did a survey amongst its readers to gain answers to these questions and the responses were a bit surprising.  Total of 49 individuals participated in the survey.  Almost all the participants were salaried employees and more than 75% of the participants were less than 30 years old.

Key Takeaways from the Survey

 

  

 * sum of all percentages will be more than 100, since few individuals have chosen more than one option.

 

1.    Only 24% out of all respondents make major part of their tax investments in the months of January to March.  Most individuals (59%) spread their investment over the entire year.  This is contrary to the popular belief that people wait till year end for tax planning.  This also correlates perfectly with the outcome of the other survey question on where do the individual invests (See Point 2).

2.    Provident Fund (78% of respondent have invested either in PPF, EPF or both) and Life Insurance (72%) are most popular investment options for tax planning.  Home Loan is also a significant component for those who have opted for it.  Since both EPF and Home Loan are periodic payments, major portion of the 80C investments are spread over the entire year and supports the findings in Point 1 above.

3.    Pension Fund (20%) and Bank Fixed Deposits (16%) are the least prefer investment options.  The quantum of investment in these instruments is also less as compared to other alternatives.

 

4.    16% of the respondents pay more than Rs. 50,000 for life insurance cover, where as significant 20% pays between Rs. 25,001 to Rs 50,000.  Taking note of the fact that life insurance coverage in India is low and pure term insurance does not cost much, the above findings justify that many individuals invest in insurance + investment products offered by the insurance companies.

5.    Infra Bonds are yet to find flavor amongst individuals (mainly due to low interest rate on offer) with only 42% individuals investing in the same.

6.    Similar for health insurance cover with just 42% of individuals opting for it.  However, this figure does not take into account the health cover provided by employer to their employees.

Are you an exception to the above findings or does your tax planning replicate this?  Do share your comments and suggestions.  Thanks.

IDFC Infrastructure Bonds – Second Tranche to open from January 17, 2011

IDFC has come out with its second tranche of infrastructure bonds.  It will be open for subscription from January 17, 2011 till February 4, 2011.  The issue size is little below Rs. 3000 crores.  This time the options available are reduced to 2 as against the last time when 4 options were available.  This issue is similar to Series 1 and Series 2 of IDFC First Tranche Issue offering 8% interest rate for a period of 10 years with a buy back option at the end of 5 years.  Upto Rs 20,000 invested in these bonds is eligible for deduction while computing taxable income under section 80CCF of the Income Tax Act.  This is over and above Rs. 1,00,000 benefit available under section 80C.

To read more about these bonds, refer to the earlier posts on IDFC Bonds - First Trance Issue (here & here).  Please note that option of Series 3 and Series 4 is not available this time.

This is a good time to invest in tax-savings infrastructure bonds for those who have not yet made the investment in earlier issues of IDFC, IL&FS and L&T Infrastructure.   

To clear your doubts on the mystery of high tax-adjusted yields advertised by these companies, do read this article on whether such yields are really true?

Endnote:  This post is an update on the blog after nearly a month on no activity.  My apologizes for the same.  I will try to post one more article by the end of this month and regular posting will start from the month of February.  Thank you for bearing this and keep visiting this blog.

L&T Infrastructure Bonds – How does it compare with IDFC Bonds

Yesterday, L&T Infrastructure announced public issue of its infrastructure bonds, investment in which will be eligible for tax deduction under section 80CCF of the Income Tax Act.  The issue size at Rs. 200 Crores with an option to retain oversubscription of Rs. 500 crores is smaller than IDFC Infrastructure Bond Issue size of Rs. 3400 crores.

Terms of the issue are as follows:

• Issue Open Date : October 15, 2010
• Issue Close Date : November 2, 2010
• Listing on NSE
• Credit Rating of CARE AA+ by CARE and LAA+ by ICRA
• Basis of Allotment : On first come first serve basis
• Tenure : 10 years

The bonds are issued in four series as given below:

Series	Interest Rate	Interest Payment	Buy Back Option	Tax Adjusted Yield*
I	7.75%	Annual	After 7 years	15.23%
II	7.75%	Cumulative	After 7 years	13.59%
III	7.50%	Annual	After 5 years	17.20%
IV	7.50%	Cumulative	After 5 years	15.75%

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* Tax adjusted yield is assuming buyback at the end of the specified period

Comparison with IDFC Bond:

The yields for Series 3 and Series 4 are same as Series 3 and Series 4 of IDFC bond issue.  Investor will in indifferent in investing in either of these issues. However, Series 1 and 2 of L&T Infrastructure issue has the buy back option after a period of 7 years and is ideal for investors looking for investing beyond 5 years but less than 10 years horizon.  For those looking for investing for 10 years, IDFC bond issue is preferred since the coupon rate is 8%.

IDFC Infrastructure Bonds - Correction

In my earlier post on IDFC Infrastructure Bonds, the tax adjusted yield was incorrectly calculated.

The effective yield for an individual in 30.90% tax slab is as follows:

Series	Coupon Rate	Tax Adjusted Yield
Series 1	8.00%	13.90%
Series 2	8.00%	12.07%
Series 3	7.50%	17.85%
Series 4	7.50%	15.75%

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Tax adjusted yield for Series 3 & 4 is assuming buyback at the end of 5th year.

Infrastructure Bonds - IDFC

Recently IDFC announced public issue of long term infrastructure bonds up to Rs. 3400 crores. These bonds are classified as “long term infrastructure bonds” and are issued under terms of Section 80CCF of the Income Tax Act. Thus investment in these bonds will be eligible for deduction equivalent to the amount invested, subject to maximum of Rs. 20000, from the taxable income. This deduction is over and above Rs. 1,00,000 deduction available under Section 80C.

Issue Details:

The bonds will be issued in four series:

Series	Interest Rate	Interest Pymt.	Buyback Option
Series 1	8.00%	Annually	No
Series 2	8.00%	Cumulative	No
Series 3	7.50%	Annually	Yes
Series 4	7.50%	Cumulative	Yes

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The bonds have the lock in of five years and are proposed to be listed on NSE and BSE on which they can be traded after the lock-in period.  Buy-back option is available after 5 years.  They are fully secured and are rated LAAA by ICRA, indicating highest level of safety.  Interest received is taxable as interest receipts.

The issue is open for subscription from September 30, 2010 till October 18, 2010. It seems to be on first come first serve basis and it is advisable to invest early, in case one is planning to do so.

How to invest?

As per the prospectus, the application forms can be obtained from the company, lead managers, lead brokers or any other broker who is the member of BSE and NSE. Hence it seems that you can get the application forms from your neighbourhood broker.

Whether to invest in this?

The investment gives tax deduction to the extent of principal investment, subject to maximum of Rs. 20,000. Taking the tax benefit in to account, the effective interest rates becomes attractive.

Series	Coupon Rate	Effective Interest Rate*
Series 1	8.00%	11.58%
Series 2	8.00%	11.58%
Series 3	7.50%	10.85%
Series 4	7.50%	10.85%

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*Assuming tax slab of 30.90%

IFCI had earlier issued similar bonds in August 2010 and their coupon rate was 7.85% (with buyback option) and 7.95% (without buyback option). Besides, IFCI and IDFC, LIC & L&T Infrastructure are also planning to raise funds through such bonds. The interest rates for such bonds must be in line with government security of similar maturities and since interest rates are expected to rise in next 6 months horizon, the coupon rate of future issuers may be a slightly higher than IDFC and IFCI issues. However, the difference may not be much.

One must avail Section 80CCF benefit of Rs. 20,000. He may think of investing the entire Rs. 20,000 in one issue or can split it between two issuers.