Our Call. PFC tax-free bonds – right time for high tax bracket investors

Anand Kalyanaraman Updated - January 22, 2018 at 10:24 PM.

With an AAA rating, the bonds are a safe bet

buy

NTPC’s tax-free bond issue a couple of weeks ago was heavily oversubscribed on the opening day itself. There may be an encore with the tax-free bond issue of Power Finance Corporation (PFC) which opens on Monday. These bonds present an attractive opportunity for investors in the higher tax slabs seeking safe, long-term options.

For retail investors – those investing up to ₹10 lakh – PFC is offering the same 7.36 per cent annually that NTPC does on the 10-year bond, and a marginally lower 7.52 per cent and 7.6 per cent on the 15- and 20-year bonds, respectively. Rates for other investors are 0.25 percentage points lower across tenures. The interest on the bonds will be paid out annually and is exempt from tax.

With an AAA rating, the bonds are as safe as they get. Also, they beat bank fixed deposits on after-tax returns. The best rate on long-term bank deposits currently is about 8.5 per cent, compounded quarterly. But this is taxable. So, the after-tax return on the bank deposit falls to about 7 per cent (for those in the 20 per cent tax bracket) and 6 per cent (in the 30 per cent tax bracket), lower than what PFC’s bonds offer. But for investors in the 10 per cent tax slab, bank deposits with about 7.9 per cent after-tax return give a better deal.

Five more tax-free bond issues should hit the market by March. But their rates will likely be lower than what PFC is offering. That’s because the rates on tax-free bonds are linked to those on government securities (G-Secs). The 0.5 percentage point cut in the repo rate by the RBI last week saw the G-Sec rate slip about 0.15 percentage points. Ergo: it’s best to lock in to the PFC bonds rather than wait.

But first, keep aside money (up to ₹1.5 lakh) for your public provident fund (PPF) investment which offers a much superior 8.7 per cent tax-free return, compounded annually. Besides, unlike tax-free bonds, the PPF investment qualifies for tax deduction under Section 80C.

The PFC tax-free bond issue size is ₹700 crore of which 40 per cent (₹280 crore) is reserved for retail investors. The issue closes on October 9 but could be closed earlier when it is fully subscribed.

The bonds will be allotted on a first-come-first-serve basis; the minimum investment is ₹5,000 (five bonds of ₹1,000 each).

PFC’s loan assets more than doubled between 2011 and 2015 to ₹2.17 lakh crore. So did profit, to almost ₹6,000 crore.

Published on October 4, 2015 17:36