IRFC tax-free bonds: good for those in higher tax bracket

Anand Kalyanaraman BL Research Bureau | Updated on January 22, 2018 Published on December 07, 2015

The ₹4,532-cr issue opens today; credit rating agencies assign ‘AAA’

After a lull, the fourth tax-free bond issue of 2015 — this time from the Indian Railways Finance Corporation (IRFC) — is opening on Tuesday. IRFC, the financial arm of Indian Railways, is raising ₹4,532 crore through the issue, which has been assigned the highest AAA rating by credit rating agencies.

Forty per cent per cent of the issue is reserved for retail investors (those who invest up to ₹10 lakh).

The issue closes on December 21 but could be closed earlier if fully subscribed.

Day 1 subscription possibility

Going by past experiences this year, the issue could be oversubscribed on the day of opening itself. The bonds will be allotted on first-come-first-served basis. The minimum investment is ₹5,000 (five bonds of ₹1,000 each).

IRFC is offering retail investors 7.32 per cent annually on the 10-year bonds, 7.53 per cent on the 15-year bonds and 7.5 per cent on the 20-year bonds. Other investors will get 0.25 percentage points less across tenures. Interest will be paid out annually and is exempt from tax.

The rates offered by IRFC’s tax-free bonds are higher than those offered in the previous issue by REC. That’s because the G-Sec yield to which the rates of tax-free bond issues are linked have moved up over the past month.

This is in anticipation of the US Fed raising rates in its upcoming meeting. But once the US Fed rate hike suspense is out of the way, the G-Sec yield in India may moderate over the coming week thanks to favourable conditions in the domestic economy. So, it makes sense to invest in IRFC’s bonds rather than wait for future bond issues.

Good for 20% plus slab

Investors in the higher tax slabs seeking safe, long-term options can subscribe to the bonds. One, the ‘AAA’ rating means highest safety. Next, the bonds score over bank deposits that at best give about 6 per cent post-tax returns for investors in the 30 per cent tax slab and about 7 per cent for investors in the 20 per cent tax bracket. Investors in the 10 per cent slab though, can skip the IRFC bond issue since bank deposits could still give better post-tax returns.

Those in the higher tax slabs can choose IRFC’s 15-year bond which carries the highest rate (7.53 per cent for retail investors). This rate is, in fact, the same high rate offered by the first tax-free bond issue this year — that of NTPC.

But first, set aside ₹1.5 lakh for investing in PPF, which offers a superior 8.7 per cent tax-free return, compounded annually, and also gives a tax break under Section 80C (unlike tax-free bonds).

Published on December 07, 2015
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