Upcoming Tax Free Bonds of 2015-2016- Should you invest?
Last week Central Board of Direct Taxes (CBDT) has approved 6 PSU’s to raise money through Tax Free Bonds of 2015-2016 for Rs 40,000 Crores. While interest rates are falling and these Tax Free Bonds of 2015-2016 are expected to have low interest rates, these are still attracting several investors now. This is due to the fact that there were no tax free bonds issued in 2014-2015. Should you invest in upcoming Tax Free Bonds of 2015-2016? Who would benefit most from such tax free bonds? Are there any alternatives to get higher tax free returns instead of investing in these tax free bonds of 2015?
What are Tax Free Bonds?
Tax Free Bonds are issued by government enterprises where the interest is tax free. Means, you need not pay any income tax on such interest amount irrespective of the amount received. If you invest in Bank FD, you may get 8.5% interest, however you need to pay income tax of 10% or 20% or 30% based on your tax slab. However, in case of tax free bonds, any interest received is tax free. No TDS would be deducted by these companies who are offering these tax free bonds.
Which are the upcoming Tax Free Bonds of 2015-2016?
As per CBDT circular issued few days back, below companies would be issue tax free bonds in 2015-2016 totalling to Rs 40,000 Crores.
- NHAI to issue tax free bonds for Rs 24,000 Crores.
- IRFC to issue tax free bonds for Rs 6,000 Crores.
- HUDCO to issue tax free bonds for Rs 5,000 Crores.
- IREDA to issue tax free bonds for Rs 2,000 Crores.
- NTPC, REC and Power Finance Corporation to issue tax free bonds for Rs 1,000 Crore each.
What would be interest rates for these upcoming Tax Free Bonds of 2015-16?
While interest rates are yet to be announced, CBDT circular indicates that Tax free bonds interest would depend on the credit rating of the company. AAA rated companies would fix interest rates of 55 basis points below Govt bond yield. AA+ rated companies would fix interest rates of 45 basis points below Govt bond yield. AA/ AA- rated companies would fix interest rates of 35 basis points below Govt bond yield. Currently 10 year bond yield is 7.15%, 15-Yr bond yield is 7.40% and 20 year bond yield is 7.48%
a) Interest rates for AAA company would be as follows:
- 10 Years Tax Free Bonds-6.60%,
- 15 Year Tax Free bonds-6.85% and
- 20 Years Tax Free Bonds-6.93%
b) Interest rates for AA+ company would be as follows:
- 10 Years Tax Free Bonds-6.7%,
- 15 Year Tax Free bonds-6.9% and
- 20 Years Tax Free Bonds-7.03%
c) Interest rates for AA / AA- company would be as follows:
- 10 Years Tax Free Bonds-6.8%,
- 15 Year Tax Free bonds-7.05% and
- 20 Years Tax Free Bonds-7.13%
What did you observe above? Highest interest rates for low credit rating companies. Credit rating indicate company ability to pay timely interest and repayment of capital. While all these are government enterprises, there would be almost zero risk in interest and capital. However, there could be a delay in repayment of interest or capital for low credit rating companies. Hence prefer to invest in high credit rating companies.
Who can invest in these Tax Free Bonds of 2015?
- High tax bracket individuals in 20% or 30% can invest in these bonds to get high returns.
- Investors who are looking for consistent returns for long term can invest in these tax free bonds.
- Investors looking for good returns with less risk can invest in these bonds.
- Since latest interest rates have already come down and going to come down further in coming months, these bonds provide good returns for investors who want to lock their money for long term for higher interest rates.
- As per CBDT circular, retail investors, HUF and NRI’s on repatriation basis can invest in these tax free bonds up to Rs 10 Lakhs. Beyond this, they would be termed as High Networth Individuals (HNI’s) where interest rates would be 0.25% less compared to normal investors. However separate guidelines would be issued for each and every tax free bond about eligibility for investment.
Who should not invest in these Tax Free Bonds of 2015-16?
- Not good for low tax bracket individuals. They can invest in several other investment options like Bank FD, Debt Mutual Funds, post office saving schemes which offer 8%+ interest rates.
- Not good for investors who are expecting good returns from their investments. They can invest in best diversified mutual funds to get good returns of 12% to 15% for long term.
- Not good for investors who want to park money for short term to long of less than 10 years. Though these are expected to list on stock exchanges, unless you have buyers, you cannot sell these tax free bonds. Park money if you feel you do not need them for 10 to 20 years.
Conclusion: Tax free bonds are good for long term investors and who are in a high tax bracket. This is one of the best investment options who want to take low risk but want consistent returns for the long term. Investors can invest part of their investment amount in these tax free bonds.
Happy investing in these tax free bonds !!!
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