This time, go for 15-year tax-free bonds

Radhika Merwin
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Green energy: More than half the money being raised by IREDA will go into wind power
Green energy: More than half the money being raised by IREDA will go into wind power

The bonds from both IIFCL and IREDA offer attractive rates of 8.8 per cent

After a brief hiatus, tax-free bonds are back again. Issues from India Infrastructure Finance Company (IIFCL) and Indian Renewable Energy Development Agency (IREDA) open on February 17 and offer similar rates. Both bonds have the highest credit rating (AAA).

Investors can lock into the 15-year bonds from either as the rates seem attractive, and higher than what was offered by IRFC, whose issue closed recently.

Good time to lock in

The rate being offered to retail investors (investment of up to ₹10 lakh) is 8.41 per cent for 10 years and 8.8 per cent for 15- and 20-year tenure. Since the rates for the 15- and 20-year bonds are similar, investors can go for the 15-year option. National Housing Bank that opened in December 2013 offered the best rates for a 15-year and 20-year tenure at 8.88 per cent and 9.01 per cent, respectively.

But investments in tax-free bonds can be a diversifier, if you still are looking for safe avenues that offer good returns.

Interest on these bonds is tax-free and they give better post-tax returns compared with bank fixed deposits.

The average 9 per cent offered by most banks on the 10-year fixed deposits yields much lower return once the tax implication is taken into consideration.

For those in the 20, and 30 per cent tax bracket, the returns on bank deposit falls to 7.1 and 6.2 per cent, respectively.

Besides, while the central bank is now clearly on a disinflationary path, a very sharp hike in rates is not expected.

Even after the central bank hiked the repo rate by 25 basis points in the January policy, the yields on the 10-year bonds have not spiked significantly.

The yields are now at 8.8 per cent. The last time yields were around same levels was near the end of the rate hike cycle from March 2010 to March 2012.

This is hence a good time to lock into tax-free bonds for this fiscal, as subsequent bond issues may not offer better rates.

If you have already invested in the IIFCL bonds that opened in December, you would perhaps do well to not put all your eggs in one basket. Choose the IREDA bonds instead.

Remember, though, to first keep aside funds for PPF that gives attractive tax-free returns of 8.7 per cent this year. Investment up to ₹1 lakh is exempt under Sec 80 C, which is not available for tax-free bonds.

About the companies

IIFCL is among the major financiers of infrastructure projects in the country.

As of March 2013, the company’s loan portfolio stood at ₹24,152 crore, showing a growth of 31 per cent over last year.

Of the total loan book, 72 per cent is direct loans to companies, three-fourth of which is in the implementation stage.

Its gross non-performing asset ratio (NPA) is at 0.98 per cent as of March 2013.

IREDA is a non-banking financial institution registered with the RBI, which finances projects for generation of energy through new and renewable sources.

As of March 2013, the company’s outstanding loan portfolio is ₹6596 crore, showing an annual growth of 39 per cent in the last two years.

Of the total loans disbursed, more than half is for wind power projects. The gross NPA is at 3.42, and the net NPA is at 0.7 per cent as of September 2013.

(This article was published on February 16, 2014)
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