Personal Finance

PFC Tax-free Bonds: Charge up your debt investment

Dhuraivel Gunasekaran | Updated on February 17, 2019 Published on February 17, 2019

Among bonds of state-run infra companies, PFC looks attractice

Over the past few months, quite a few instances of credit-quality downgrades and defaults in the bond market have jittered fixed-income investors. Capital safety has now become a prime concern for most investors. At this juncture, investors looking for debt instruments that provide capital safety and decent returns can consider tax-free bonds available in the secondary market. Tax-free bonds issued by State-run infrastructure finance companies over the past six years are listed on the BSE and the NSE, and traded actively. Among these, the ones issued by the Power Finance Corporation (PFC) look attractive.

Since these entities are backed by the government, the investments made in their tax-free bonds enjoy capital safety. Further, the bonds issued by most of these companies are rated with the highest grade of ‘AAA’.

PFC issued tax-free bonds in FY12, FY13, FY14 and FY15. Totally, it has issued 18 series of tax-free bonds. According to data compiled by HDFC securities retail research, three series of tax-free bonds, with a yield-to-maturity (YTM) of 5.6-6.3 per cent, are traded actively on the BSE.

For instance, PFC 892PFC33 series (ISIN: INE134E07463) — with a coupon rate of 8.92 per cent and residual maturity of 14.8 years — trades with a YTM of 6.3 per cent on the NSE.

 

The interest paid by tax-free bonds are exempt from income tax. Hence, the current YTM of 6.3 per cent translates to 9 per cent pre-tax yield for investors in the 30 per cent bracket. This seems to be a better deal for retail investors than bank fixed deposits. Currently, public and private sector banks offer 6-8 per cent pre-tax interest rate for their five-year FDs.

These three series of PFC tax-free bonds have been trading with a daily average volume of 300-600 units over the past one month. Further, these bonds are available with a residual maturity of 3-14.8 years. Investors can buy the bonds that match their investment horizon.

Retail investors can buy and sell tax-free bonds through a demat account. Selling tax-free bonds in the secondary market attracts capital gains tax. If you sell these bonds within 12 months from the date of purchase, you will have to pay tax on the gains as per your tax slab. If you sell after 12 months, tax has to be paid at a flat rate of 10 per cent. No indexation benefit is available.

About PFC

PFC was established in 1986 and is one of the government-owned financial institutions that provide financing exclusively to the power sector, including for thermal, hydro, nuclear, wind and solar power generation; transmission and distribution; and renovation and modernisation of existing projects.

The Centre remains the majority shareholder in PFC. The government supports the company financially and operationally in various ways, including conferring special status to raise capital gains tax-exempt bonds.

PFC is the largest lender to the power sector with a share of over 20 per cent, and plays a key role in channelling finance to PSUs. As of September 30, 2018, PFC’s tier-I capital adequacy ratio (CAR) was 14.9 per cent, overall CAR was 17.9 per cent, and networth was ₹38,274 crore.

Published on February 17, 2019

A letter from the Editor


Dear Readers,

The coronavirus crisis has changed the world completely in the last few months. All of us have been locked into our homes, economic activity has come to a near standstill. Everyone has been impacted.

Including your favourite business and financial newspaper. Our printing and distribution chains have been severely disrupted across the country, leaving readers without access to newspapers. Newspaper delivery agents have also been unable to service their customers because of multiple restrictions.

In these difficult times, we, at BusinessLine have been working continuously every day so that you are informed about all the developments – whether on the pandemic, on policy responses, or the impact on the world of business and finance. Our team has been working round the clock to keep track of developments so that you – the reader – gets accurate information and actionable insights so that you can protect your jobs, businesses, finances and investments.

We are trying our best to ensure the newspaper reaches your hands every day. We have also ensured that even if your paper is not delivered, you can access BusinessLine in the e-paper format – just as it appears in print. Our website and apps too, are updated every minute, so that you can access the information you want anywhere, anytime.

But all this comes at a heavy cost. As you are aware, the lockdowns have wiped out almost all our entire revenue stream. Sustaining our quality journalism has become extremely challenging. That we have managed so far is thanks to your support. I thank all our subscribers – print and digital – for your support.

I appeal to all or readers to help us navigate these challenging times and help sustain one of the truly independent and credible voices in the world of Indian journalism. Doing so is easy. You can help us enormously simply by subscribing to our digital or e-paper editions. We offer several affordable subscription plans for our website, which includes Portfolio, our investment advisory section that offers rich investment advice from our highly qualified, in-house Research Bureau, the only such team in the Indian newspaper industry.

A little help from you can make a huge difference to the cause of quality journalism!

Sincerely,

Support Quality Journalism
This article is closed for comments.
Please Email the Editor
You have read 1 out of 3 free articles for this week. For full access, please subscribe and get unlimited access to all sections.