Fintotal News Analysis | IIFCL Tax Free Bonds-Tranche 1 October 2013-Analysis for Retail Investors
IIFCL Tax Free Bonds-Tranche 1 October 2013-Analysis for Retail Investors
Ruby Jacob, 03 Oct 2013

It is the season of tax-free bonds from infrastructure companies. IIFCL is the third issuer in this financial year after REC and HUDCO, whose offer is ongoing. IIFCL's offer of tax-free bonds is open for subscription between 03 October 2013 and 31 October 2013.

Why is IIFCL issuing bonds?

IIFCL is an infrastructure finance company. It provides long-term finance for projects in transportation, energy, water, sanitation, communication, social and commercial infrastructure. Some of its funds are raised from the market in the form of bonds. IIFCL will raise about Rs 2,500 crores in tranche 1 of these series.

Are IIFCL bonds safe?

Yes, we are quite comfortable with the rating AAA it has got from the rating agencies. IIFCL is a wholly owned company of the government of India, so there is very little concern of the bonds defaulting.

What are the returns in IIFCL bonds?

Coupon rate 10 years bonds- 8.26% 15 years bonds- 8.63% 20 years bonds- 8.75% If your application is less than Rs 10 lakhs you come under retail category. Minimum application amount is Rs 5000 and the face value of each bond is Rs 1000.

Can NRIs apply for these bonds?

No, NRIs cannot apply for IIFCL bonds.

How to apply for IIFCL Bonds?

Application of IIFCL bonds can be made in both physical and demat form. Application can also be made in ASBA or non-ASBA mode. Applications must be made only in the prescribed Application Form. You can download the forms or apply online through SBI Capital Markets, Karvy Computershare, A K Capital Services, ICICI Securities or Axis Capital.

What really is tax-free in IIFCL bonds?

Here is where you need to pay good attention. Firstly, it has nothing to do with tax rebate of Sec 80 CCF. Section 80 CCF (Rs 20,000) has been scrapped and you will not get any tax deduction on infrastructure bonds for the money invested. Hence please do not fall for this trap. Now, what is tax free? Income earned as interest is tax-free. Thus, the investment itself does not qualify for any rebate; only coupon interest is tax free. However, in case you sell the bonds before maturity you need to pay capital gains tax. Therefore, you pretty much need to hold until maturity if you really wish to get tax-free returns.

Is there a lock-in period in IIFCL bonds?

No, there is no lock-in period for bonds. However, the only way to exit the bonds before maturity is to sell them through the exchange where it is listed. These bonds are to be listed on BSE. However, keep in mind that tax-free bonds are not freely traded. Less volume of traded bonds means you might not get good value for selling them. In addition, even if you managed to, you would have to pay capital gains tax.

Is it good to invest in IIFCL bonds?

Retail investors whose taxable income falls in the 20% or 30% bracket can buy these bonds to hold them to maturity. Post-tax yield of 20-year IIFCL tranche 1 bond comes to 11% for those in 20% tax bracket and 13% for those in 30% tax bracket.

These can ideally replace your PPF investment for long-term goals like retirement. However, do not go overboard with them, since coupon rate of 8.75% is not likely to beat inflation. In the long term unless your investments have stayed above inflation levels, maturity amount you take away will hardly be sufficient to meet the goal you had in mind.

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