National Highways Authority of India's ongoing tax-free bond issuance may be a befitting end to this year of debt. Sources involved with the issuesay it has been subscribed to the tune of more than ~20,000 crore. Tomorrow may, therefore, be the last chance for retail investors to partake in the issue.
Investors who missed this issue can take heart, though. For, Power Finance Company (PFC) is opening its issue on Friday. PFC is offering similar rates as NHAI: Annual taxfree returns of 8.2 and 8.3 per cent for 10 and 15 years, respectively. The minimum investment will, however, be lower at ~10,000, as against NHAIs ~50,000.
Do not confuse these issues with tax-saving bond by the likes of IDFC and L&T. The taxsaving bonds allow investors to claim a deduction of up to ~20,000 under Section 80CCF. But the interest earned thereon is taxable.
In the case of NHAI bonds, there is no deduction on the principal available. However, the interest earned will be completely tax-free under Section 10(15)(iv)(h).
Lets say you invest ~50,000 for a 10-year tenure. You will earn ~4,100 annually (there is no cumulative interest option), that is ~41,000 over 10 years, entirely tax-free. Compare this with a 10-year bank fixed deposit. State Bank of India (SBI) is currently offering 9.25 per cent return annually. For the same investment amount, here you will earn ~4,625 yearly. However, this will be taxable. For those in the highest tax bracket, the return in hand after deducting tax will be ~3,196, almost ~1,000 less than that earned from NHAI bonds.
Certified financial planner Suresh Sadagopan is advising clients falling in the highest tax bracket to consider the issue. Even those looking at fixed income investments from an asset allocation perspective can consider this. Especially since the rates will be locked in at investment. Unlike other small savings instruments like Public Provident Fund (PPF), Post Office Monthly Income Schemes and National Savings Certificates that have been linked to 5- or 10-year government bond yields and will, as aresult, vary every year.
So, though an 8.6 per cent annual taxfree return on PPF with or without the tax deduction sounds enticing, it may not be offered from next year. More, with talk of the interest-rate cycle having peaked, rates may start sliding.
Also, PPF is quite illiquid, with a lock-in of six years and even post that, the withdrawal amounts allowed every year are capped. Comparatively, NHAI bonds will be liquid, as they will be listed on the exchanges, providing investors an exit route. That is, there is no lock-in period. If these bonds list at a premium, one can cash on the listing gains as well. But, this is not advisable for long-term investors.
Plus, once the rate cycle reverses, there may be a higher demand for these bonds and there will be scope for capital appreciation.
One can even consider making trading gains by exiting the bonds mid-way. Be careful, though, as there will be a capital gains tax in this case.
If the bonds are sold within a year, then the gains will be added to your income and taxed. If held for more than a year before sale, the capital gains will be taxed at 10 per cent without indexation or 20 per cent with indexation.
How to apply to Power Finance Company Bonds?
You can download the forms below
Submit the filled up form to Collection canter near you
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Application form for Applying for Tax Saving Long Term Infrastructure Bond
Current open Long Term Infra Bond Application form
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