National Housing Board Tax Free Bonds – March 7, 2014 to March 18, 2014

NHB has joined the bandwagon with its tax free bonds.  The issue is open for subscription till March 18, 2014 with best available interest rates amongst other live issues.  While IRFC is facing problem with attracting investors forcing it to extent the closing date to March 14, 2014, NHB is providing short window of 12 days for subscription.

Key Features of Bond Issue:

For other details about the issue as well as risk factors, kindly go through the Prospectus before investing.

Comparison

Out of all the current bond issues live for subscription, NHB provides the best interest rates and hence should be the first choice of investment for individuals looking for investment in tax free bonds.  However, one should invest immediately and should not wait till the closing date since the issue is on first cum first serve basis and the issue size is small.

IIFCL and Ennore Port Limited Tax Free Bond Issue - Comparison

Alongwith IREDA tax free bonds, IIFCL’s and Ennore Port Limited’s (EPL) tax free bond issue is also open for subscription this week.  While IIFCL issue opens on 17^th Feb 2014, EPL issue is schedule to open on 18^th Feb 2014.  Including IREDA, investors have 3 options to invest in tax free bond issues giving attractive interest rates.

Read about IREDA Tax Free Bond Issue here

Key Features of Bond Issues:

	IIFCL	EPL
Issue Size	Rs. 750 crores with option to retain oversubscription till Rs. 2,823 crores	Rs. 250 crores with option to retain oversubscription till Rs. 500 crores
Issue open & close date	17th Feb 2014 and 14th Mar 2014.  Allotment on first come first serve basis.	18th Feb 2014 and 14th Mar 2014.  Allotment on first come first serve basis.
Minimum investment	5 bonds of Rs. 1,000 FV (i.e. Rs. 5,000)
Secured	Yes. Ranked paripassu with the claims of other secured creditors.
Listed on	BSE
Mode of Allotment	Demat as well as Physical.  However, trading can take place in demat form only.
Credit Rating	Care AAA by Care (indicating lowest credit risk and highest safety)	Care AA by Care (indicating low credit risk and high safety)
Interest Payment	Annual

Issue structure and interest rates for retail investors:

Tenor (in years)	Series	Coupon Rate (%) p.a.
		IIFCL	EPL
10	Series 1B	8.41%	8.61%
15	Series 2B	8.80%	9.00%
20	Series 3B	8.80%	9.00%

For other details about the issue as well as risk factors, kindly go through the prospectus of IIFCL and EPL before investing.

Read about who should invest in tax free bonds here.

Comparison between IREDA, IIFCL and EPL

EPL provides slightly higher interest rates as compared to both IREDA and IIFCL which offers same interest rates.  However, the credit rating of EPL is lower than IREDA and IIFCL.  Further EPL’s issue is smaller in size as compared to other two.  Since 20 basis point additional interest for 15 years and 20 years tenure do not make any significant difference to the overall returns, it is advisable to stick to more secured issues of IREDA and IIFCL.

IREDA Tax Free Bonds Issue - 17th Feb 2014 to 10th March 2014

Post rate hike by RBI on 28th Jan, 2014, IREDA (which stands for Indian Renewable Energy Development Agency Limited) is the first company to come out with the tax free bond issue at an attractive interest rates.  In this post, we shall highlight key features of the bond issue:

Key Features of Bond Issue:

Issue Size	Total Rs. 1,000 crore including green shoe option
Issue open & close date	17th Feb 2014 and 10th Mar 2014.  Allotment on first come first serve basis.
Minimum investment	5 bonds of Rs. 1,000 FV (i.e. Rs. 5,000)
Secured	Yes. MNRE (which is Ministry of New and Renewable Energy) has given letter of comfort on behalf of IREDA for its payment obligations w.r.t. tax free bonds
Listed on	NSE and BSE
Mode of Allotment	Demat as well as Physical.  However, trading can take place in demat form only.
Credit Rating	Care AAA by Care (indicating lowest credit risk and highest safety)
Interest Payment	Annual

Issue structure and interest rates for retail investors:

Tranche – I SERIES	Coupon Rate (%) p.a.	Tenor (in years)
Series IB	8.41%	10
Series IIB	8.80%	15
Series IIIB	8.80%	20

For other details about the issue as well as risk factors, kindly go through the Prospectus before investing.  And do not forget to read who should invest in tax free bonds before investing in IREDA tax free bond issue.

Tax Free Bonds – who should invests?

This seems to be the season for tax free bonds.  We have already seen issues from REC, HUDCO and IIFCL; and now, PFC and NHPC have join the bandwagon.  Significant efforts are spent by media in analyzing all the issues i.e. what they offer to investors and which is the best one to invest.  In this article, we shall not look into that but focus more on who should invest in such issues and what aspects the investor needs to take care of before investing in tax-free bonds.  Before that, a synopsis of the ongoing PFC and NHPC bond issue.

PFC and NHPC issue

Bond issues for PFC and NHPC are open right now offering bonds for 10, 15 and 20 years for similar tenure.  Below are the brief details about both the bond issues:

The issue is priced at attractive rates which is same for both PFC and NHPC issue.  These being tax free bonds, any interest received on these bonds is tax free. Accordingly, if one considers pre-tax returns, they are higher than what long term debt mutual funds have provided in last 5 years (7.83% p.a. pre-tax returns as per Value Research).

Pre-tax Returns on PFC and NHPC tax free bonds

Interest Rates	Tax Bracket
	10%	20%	30%
8.43%	9.37%	10.54%	12.04%
8.79%	9.77%	10.99%	12.56%
8.92%	9.91%	11.15%	12.74%

Who should invest in such bonds?

The interest rates are excellent, risk is at the nadir and tenure is long term.  So whether all and sundry should invest in such bonds?  The answer obviously is no.  One needs to take care of following aspects before deciding to invest in these and any other tax-free bonds:

1. This is a long term investment.  Though the bonds are listed and can be traded, one needs to assume that they will not get back the money before the tenure of investment.  Even if there is 1% probability of you requiring the money anytime during the tenure, then one should not consider this investment. 
2. The pre-tax returns decreases for investors falling in lower tax brackets.  So in case you are in 30% tax category bracket, the investment makes more sense to you rather than for people falling under 10% tax category bracket.
3. If you have any loans outstanding, whether it is credit card loan, personal loan, car loan, home loan, etc, the money should be utilized in paying back the loan rather than investing in tax free bonds.
4. These bonds offers good returns as compared to debt mutual funds.  In case you are looking for long term investment in debt funds, tax free bonds are also an option to invest.
5. People on the verge of retirement can replicate this as a pension plan with regular income.
6. PPF returns are almost at par with returns on tax free bonds, however PPF offers more flexibility in withdrawing the amount when required (e.g. by way of loan) and returns on PPF are cummulative.  Hence one should exhaust PPF investment limit before investing in tax free bonds.

The above list is not exhaustive, but one should take the same into account before investing in tax free bonds.

Are you investing in tax free bonds? Share your reason for investing in the comments section below.

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. 

SBI Bonds – one more opportunity to invest in a good instrument, but you must be really fast to pick it up!

SBI is back again with its second long tenure bond issue.  It had raised Rs. 1,000 crores in October 2010 and is now contemplating raising another Rs 2,000 crores with an option to retain over-subscription in Retail Category.  The bonds are issued in two categories – Retail & Non-retail and are available for the tenure of 10 years and 15 years.  The details of the bond issue are:

Series	Series 3 (Tenure 10 Years)		Series 4 (Tenure 15 Years)
Categories	Non-retail	Retail	Non-retail	Retail
Interest Rate	9.30%	9.75%	9.45%	9.95%
Call Option*	After 5 years		After 10 years

 *option for SBI to redeem the bonds

Issue Open Date: 21^st February 2011

Issue Close Date: 28^th February 2011

The closing date is irrelevant since going by the response the earlier issue of SBI bond received; it is most likely to get oversubscribed by end of the first day.   Hence investors willing to invest in this instrument should ensure that they submit their application forms on the first day itself.

This brings us to the procedure for subscribing these bonds.  These bonds are not available for online subscription and one need to visit SBI branch to collect and submit the application form.  Demat account is mandatory and these bonds will be listed on stock exchanges.  Hence it provides liquidity if someone wants to sell the bonds before completion of the tenure.  

Interest earned is taxable and if the bonds are sold on stock exchange, then they are also liable for capital gain tax.

How does it compare with other investment options (for retail investors)?

Though these bonds are unsecured, it carries AAA rating by CRISIL and is issued by one of the most trusted bank of India.  Hence an investor can be reasonably assured of the investments.  There are very few comparable options available for such a long tenure.  The table below gives comparison with other investment alternatives available for retail investors.

	SBI Retail Bonds	Bank Fixed Deposits	PPF	Infrastructure Bonds
Tenure	10 & 15 Years	Max 10 Years	15 Years (extendable)	Max 10 Years
Coupon Rate	9.75% – 9.95%	9.25%*	8%	8% – 8.30%
Tax	Taxable	Taxable	Tax-Free	Taxable
Limits	Rs. 5,00,000	No Limits	Rs. 70,000 p.a.	No limit

 *Kotak Mahindra Bank 10 Year Fixed Deposit

As can be seen, there is dearth of options for a person looking to invest for 15 years, except for PPF and this long tenure makes SBI bonds attractive. The retail bonds score over all forms of investments, except for PPF.  However, in case of PPF, there is an upper limit of Rs. 70,000 p.a. whereas, one can invest up to Rs. 5,00,000 in SBI Bonds. 

 

Hence for an investor who has exhausted his PPF limit for the current year, these bonds provide good long term investment opportunities.

Are you planning to invest in SBI Retail Bonds?  Were you lucky to get allotment in the earlier SBI Bond Issue?  Do share your comments with other readers below.

Endnote:  In case you have not yet participated in the survey of planning your tax-related investments, you can do so by clicking here.  The survey closes on Sunday, 20^th February 2011.  Thanks.