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Last Updated : Sep 18, 2015 06:09 PM IST | Source:

Forthcoming tax free bonds are good investment opportunity

Given the tax free interest on offer and the liquidity, it is a good investment option for fixed income investor.

Anil Chopra
Bajaj Capital

As the name suggests, tax-free bonds are financial instruments, interest on which do not attract any tax and thereby offer a better tax adjusted return to investors. These bonds have emerged as a popular choice among investors due to the taxation benefit it offers. Tax-free bonds are generally issued by government enterprises and have a fixed interest rate. As the proceeds from the bonds are invested in infrastructure projects, they have a long-term maturity of typically 10, 15 or 20 years. These bonds are listed on the stock exchange and thereby offer liquidity to the investor in the secondary market. They carry credit ratings from one of the credit rating agencies approved by SEBI as well as Reserve Bank of India (RBI).

You should consider investing in tax free bonds as -

•Interest from these Bonds do not form part of total income as per provisions of Section 10 (15) (iv) (h) of Income Tax Act, 1961 read along with Section 14A (1) of the Income Tax Act.
•Since the interest income on the bonds is exempt, no tax deduction at source (“TDS”) is required. However interest on application money would be liable for TDS as well as would be subject to tax as per present tax laws.
•Wealth tax has been abolished with effect from financial year 2015-16 that is assessment year 2016-17.
•These bonds have very low default risk as they are issued by government-backed entities.
•Credit rating agencies rate these instruments after assessing the financial health of the entities issuing the bonds.
•The minimum investment can be from as low as Rs 5,000.
•At times when bank fixed deposit rates are coming down, tax-free bonds are an attractive option.
•Retail investors can invest up to Rs 10 lakh in each issue.
•Investors can exit from these tax-free bonds before maturity by selling them on stock exchanges. Taxfree bonds issued in the past are already listed on the
stock exchange and are fairly traded offering decent liquidity to the investors.

For the current financial year (2015-16)

The Government of India vide notification 59/2015 dated 6/7/2015 has authorized seven state-owned entities to raise Rs. 40,000 Crore in the current fiscal (2015-16) through tax-free bonds. The bonds can be held either in physical or in demat format. However, PAN is mandatory for transactions .The tenure of the bonds will be of 10-15-20 years. As per the notification, at-least 70% of the aggregate amount of bonds issued by each entity shall be raised through public issue and 40% of such public issue shall be earmarked for RIIs. It means out of 40,000 cr approx Rs. 11,200 cr will be raised through retails investors and balance amount from HNI/Corporates.

Bond issuing entities are-

National Highways Authority of India (NHAI)
Indian Railway Finance Corporation (IRFC)
Housing and Urban Development Corporation Limited (HUDCO)
Indian Renewable Energy Development Agency (IREDA)
Power Finance Corporation (PFC)
Rural Electrification Corporation (REC)
National Thermal Power Corporation Ltd (NTPC)


These bonds are completely tax free but capital gains made on selling of tax-free bonds on stock exchanges are taxed. If the holding period is less than 12 months, capital gains on sale of tax-free bonds on stock exchanges are taxed as per the tax slab of the investor. If bonds are held for more than 12 months, the gains are taxed at 10.3 per cent.
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First Published on Sep 18, 2015 06:09 pm
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