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.

“I MUST BE CRUEL ONLY TO BE KIND”

Impact of budget on an individual taxpayer 

Honourable Finance Minister quoted Shakespeare's immortal words “I must be cruel only to be kind” before beginning his speech on tax proposals.  However for an individual, the budget seems to be a mix of kind and cruel treatment.  Kind enough to tweak the tax slabs favorably and providing additional tax deduction avenues in the form of interest income from savings account deposit and preventive medical check-up and cruel enough to take the entire benefit by way of increase in service tax and excise duty rates. 

THE KIND TREATMENT

The largest benefit given to individual tax payers in the budget is the favourable revision of tax slabs.  The exemption limit has been increased from Rs. 1,80,000 to Rs. 2,00,000 for all individuals (males and females aged less than 60 years).   Taxable income more than Rs. 8,00,000 and less than Rs. 10,00,000 which currently is taxed at 30% shall be taxed at 20% after the budget announcement.  This is a clear benefit of Rs. 20,000 for individuals earning more than Rs. 8,00,000.  The revised tax slabs now are - 10% tax rate for taxable income greater than Rs. 2,00,000 to Rs. 5,00,000; 20% tax rate for taxable income greater than Rs. 5,00,000 to Rs. 10,000,000 and 30% tax rate for taxable income greater than Rs. 10,000,000.

The deductions available for individuals have also increased by making interest income from saving account deposits up to Rs. 10,000 eligible for deduction from taxable income.  In addition, the finance minister has introduced one more avenue for tax deduction – Rajiv Gandhi Equity Scheme (RGES).  Though the details of the scheme are not cleared, investment in equity up to Rs. 50,000 shall be eligible for 50% deduction for individuals earning less than Rs. 10 lakhs.  However, such investment shall have locked in of 3 years.

Further,  expenditure incurred for preventive medical check-up for self, spouse, dependent children or parents up to Rs. 5,000 shall be eligible to be included under overall deduction of Rs. 15,000 under Section 80D.

There are further smaller relief like reduction in the securities transaction tax on delivery based transactions of equity securities from 0.125% to 0.1% of the transaction value and increase in threshold from Rs. 2,500 to Rs. 5,000 for deducting tax on interest from debentures.  Further both listed and non-listed debentures get covered now under the above criteria.

Last year, budget incorporated a provision that the life insurance premium, in order to get benefit under Section 80C, should not be more than 20% of the actual capital sum assured.  Now the budget has proposed that the premium should not be more than 10% of the actual capital sum assured.  This is good for the customers, since this shall result in enhanced insurance coverage for the same amount of premium.  Further the budget also specifies in detail how the capital sum assured shall be calculated so that insurance company do not circumvent this provision by varying the sum assured from year to year. 

THE CRUEL TREATMENT

The cruelest shock in the budget for individuals is the increase in service tax rate from 10% to 12%.  There has also been hike in excise duty rates and this along with service tax rate increase almost negate the benefit of tax savings on account of slab revision.  This shall maintain the inflationary pressure on the prices and shall ensure that interest rates of loan remain high for substantial part of the year.

Further w.e.f October 2012, sale of residential property for transaction value more than Rs. 50 lakhs in specified urban agglomeration or Rs. 20 lakhs in any other area shall attract tax deduction at source of 1% of the transaction value irrespectively whether the transfer is profitable or not.  Individuals cannot evade this, since it has been made mandatory to provide proof of tax deduction while registering the transfer.

Cash purchase of bullion and jewellery for amount more than Rs. 2 lakhs shall lead to tax collection of 1% of the value by the seller.

In case, one has any asset located outside India (financial or otherwise), he has to compulsorily file return of income in India irrespective of whether he has taxable income or not. 

BEING SIXTY GETS MORE SWEETER

After reducing the senior citizen age limit from 65 years to 60 years last year, the fascination of Mr. Mukherjee for senior citizen continues and he has exempted them from paying advance tax in case they do not earn any income from business and profession.  Further the age limits in Section 80D (Health Insurance Premium) and Section 80DDB (treatment of specified ailment) and for no tax deduction certificate has been rationalized to 60 years from 65 years at present. 

Thus it can be seen that the budget is a mixed bag of kind and cruel treatment for an individual taxpayer. 

Modified version of the article to appear in DNA Newspaper dated 17th March 2012

Best 5 Year Tax Saving Fixed Deposits

It is the season of planning your tax related investments and most of you shall be busy in identifying where to invest and which insurance policy to purchase.

One of the instrument which gives benefit under Section 80C of the Income Tax Act is 5 year tax saving fixed deposit.  Many find this a good instrument against other available options, since this is risk-free investment.

To enable you to choose the best 5 year tax saving fixed deposit on offer, Bachhat has updated its page on interest rates offered by banks on fixed deposits.  One can have a look at it here.

List of banks offering best rates on 5 year tax saving fixed deposit:

Banks	Interest Rates
Dhanlaxmi Bank	10.10
Oriental Bank of Commerce	9.75
Tamilnad Mercantile Bank	9.75
City Union Bank	9.50
IDBI Bank	9.50
Karnataka Bank	9.50
State Bank of Bikaner & Jaipur	9.50
State Bank of Travancore	9.50

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 !!