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Missed the NTPC tax-free bond issue last week? No sweat. There’s another opportunity to invest in similar AAA rated bonds, offering the same attractive rates as NTPC. India Infrastructure Finance Company Ltd (IIFCL) is issuing its second tranche of tax-free bonds this year. The issue, which opens on Monday, offers retail investors (those who invest up to Rs 10 lakh) 8.66 per cent annually on 10-year bonds, 8.73 per cent on 15-year and 8.91 per cent on 20-year instruments. Interest will be paid annually. The rates being offered by IIFCL beat the after-tax returns on bank deposits for investors across tax slabs.
Bank deposits of five years or more currently offer a best rate of 9.25 per cent annually which after quarterly compounding works out to 9.58 per cent. But unlike tax-free bonds, the returns on bank deposits are subject to tax. So, the after-tax return on the bank deposit falls to 8.6 per cent for investors in the 10 per cent tax slab, 7.6 per cent for those in the 20 per cent tax slab and just 6.6 per cent for those in the 30 per cent slab.
The bonds on issue by IIFCL now carry higher rates than those issued by it in the first tranche in October. This is because the yields on government securities (G-secs) to which the rates on the tax-free bonds issued by government-controlled entities are linked, have moved up in recent weeks. The 10-year G-sec yield currently hovers around 8.8 per cent. G-sec yields may moderate from current levels, and so it is a good idea to invest in the tax-free bonds now rather than wait. Bond issues in the coming months may not be able to match the high rates being offered now. Allotment of bonds by IIFCL will be done on first-come-first-served basis. Going by the experience of the NTPC bond issue, it makes sense to move quickly and put in your application on the day the bond opens. The NTPC issue, though meant to be open for two weeks, was oversubscribed within two days of launch and closed early.
IIFCL’s tax-free bonds are a good option for those looking for safe, long-term investments. But the public provident fund (PPF) is better because in addition to a healthy tax-free return (8.7 per cent currently), it also offers tax deduction up to the maximum investment limit of Rs 1 lakh a year. The investment in tax-free bonds does not get you any tax deduction. So, keep aside funds for the PPF investment before investing in the tax-free bonds.
IIFCL is among the major financiers of infrastructure projects in the country and had disbursed loans worth Rs 26,582 crore as on March 2013. Its consolidated profit in FY13 grew nearly 50 per cent year-on-year to Rs 1,009 crore, while the net non-performing asset ratio was moderate at 0.76 per cent.
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