If you did not invest in the tax-free bonds issued earlier this year, here is another good opportunity to do so. NTPC, the country’s leading power generator, is offering attractive rates on its bond issue, which opens on Tuesday.

Retail investors (those who invest up to Rs 10 lakh) will get 8.66 per cent annually on the 10-year bonds, 8.73 per cent on 15-year and 8.91 per cent on the 20-year instruments. Investors having a long-term horizon and looking for safe instruments can consider buying.

The returns on NTPC’s bonds are higher than the after-tax returns on bank deposits. Currently, the best rate on five-year bank deposits is 9.25 per cent, which compounded quarterly works out to 9.58 per cent. But after considering taxes, the return falls to 8.6 per cent for depositors in the 10 per cent tax slab, 7.6 per cent for those in the 20 per cent tax slab and a mere 6.6 per cent for those in the 30 per cent slab.

NTPC’s bonds thus, offer a superior alternative to bank deposits for investors. Interest on the bonds will be paid out annually and will not be subject to tax.

The rates on tax-free bonds issued by public institutions are linked to those prevailing for Government securities (G-secs). NTPC is able to offer attractive rates because G-sec yields have been quite buoyant in recent times. The yield on the 10-year G-sec is currently around 8.7 per cent. This may moderate in the coming months, and so, future tax-free bond issues may not be able to match rates being offered by NTPC. So, it is a good time to invest in the bonds now.

NTPC’s bonds are rated ‘AAA’, indicating the highest degree of safety for investors. This is a notch higher than the ‘AA+’ rating for the tax-free bonds being issued by housing financier HUDCO from Monday.

Though HUDCO is offering 10 basis points (0.1 percentage point) more than NTPC, the latter provides more investor comfort, thanks to its higher bond rating and regular disclosures as a listed company.

NTPC’s business model, based on regulated returns, is also more stable and provides better long-term visibility on profits. Its revenues from operations have grown at an annual average of around 13 per cent in the four years to 2012-13 while its profits have grown at nearly 12 per cent annually.

Before investing in tax-free bonds, keep aside funds for your public provident fund (PPF) investment. With good tax-free returns (8.7 per cent currently), PPF provides tax deduction on the initial investment up to Rs 1 lakh, making it a superior investment.

(This article was published on November 30, 2013)
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