After REC and HUDCO, India Infrastructure Finance Company Ltd (IIFCL) has launched its tax-free bond issue. The bonds offer attractive tax-free returns to those in the higher tax brackets (20 and 30 per cent). The rates being offered to retail investors (investment of up to Rs 10 lakh) are 8.26 per cent for 10-year tenure, 8.63 per cent for 15 years 8.75 per cent for 20-year instruments.

IIFCL’s 20-year bonds offer higher interest rates than similar bonds from earlier issuers. But those looking at the 10- and 15-year options should consider the HUDCO bonds (yet to close) which offer better rates. The bonds of both IIFCL and HUDCO are secured and have high safety levels. But the ‘AAA’ rating for IIFCL’s bonds indicates a higher degree of safety than the ‘AA+’ rating on HUDCO’s bonds.

The interest rates on tax-free bonds issued by public institutions are linked to yields on government securities (G-secs). This is a good time to lock into these bonds because the yield on the 10-year G-sec has risen sharply in the last one year and is now at 8.62 per cent. A sharp rise from the current levels seems unlikely. So, tax-free bond issues in the coming months may not offer better rates than those on offer today.

For investors in the higher tax slabs, tax-free bonds offer more than bank deposits. Today, the best rate on five-year bank deposits is 9.5 per cent. After considering quarterly compounding and taxes, this translates into an annual return of 7.82 per cent for investors in the 20 per cent tax slab and 6.8 per cent for those in the 30 per cent slab. This is lower than the return one can get from tax-free bonds. The interest on tax-free bonds is paid out annually.

But before investing in the tax-free bonds, keep aside funds for your public provident fund (PPF) investment that not only gives healthy tax-free returns (8.7 per cent currently) but also tax deduction on the initial investment of up to Rs 1 lakh. The initial investment on the tax-free bond does not get you any deduction.

IIFCL is among the major financiers of infrastructure projects in the country. As on March 2013, it had disbursed loans of Rs 26,582 crore. Its consolidated profit in FY13 grew almost 50 per cent over the previous year to Rs 1,009 crore. Its net non-performing asset ratio at a consolidated level was a moderate 0.76 per cent.

(This article was published on October 5, 2013)
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