Fintotal News Analysis | IIFCL Tax Free Bonds Tranche II- February 2013. What Is It About?
IIFCL Tax Free Bonds Tranche II- February 2013. What Is It About?
Ruby Jacob, 26 Feb 2013

IIFCL's tranche 2 of tax free bonds will be open for subscription from 25 February 2013 to 15 March 2013. It had raised funds earlier in January in tranche I issue.

Why is IIFCL issuing bonds?

IIFCL is an infrastructure financing company. They raise funds from markets and lend money to infrastructure projects. IIFCL raises money from the market in the form of bonds. IIFCL wishes to raise about Rs 200 crores in tranche II.

Are IIFCL bonds safe?

Yes, we are quite comfortable with the rating it has got from the rating agencies. IIFCL is a whole owned company of government of India.

What are the returns in IIFCL tax free bonds?

Coupon rate

10 years bonds- 7.36%

15 years bonds- 7.52%

20 years bonds- 7.58%

If your application is less than Rs 10 lacs you come under retail category. The minimum application amount is Rs 5000 and the face value of every bond is Rs 1000.

Can NRI apply for these bonds?

No, NRIs cannot apply for these 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 at http://www.iifcl.org/Content/IIFCL%20Tax%20free%20bonds%202012-13%20T-II.aspx or through lead managers SBI Capital Markets, A K Capital Services, Axis Capital, ICICI Securities or Kotak Mahindra Capital.

What 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 20000) has been scrapped this year and you will not get any tax rebate on infrastructure bonds like the one you got last year. Hence please do not fall for this trap.

Now, what is tax free? Income is taxable. Similarly interest is treated as income and is taxable. For example one earns interest from his fixed deposits with banks he needs to pay tax on it. But in the case of these bonds the interest you earn is tax free. The investment itself does not qualify for any rebate only the coupon interest is tax free. But in case you sell the bonds before maturity you need to pay capital gains tax. So you pretty much need to hold till maturity if you really wish to get tax free returns.

Is there any lock in IIFCL bonds?

No, though the only way to exit is by way of selling it in the secondary market. These bonds are to be listed in BSE.

But this does not make the bonds any liquid. Tax free bonds are not freely traded on the exchanges. You might not be able to find buyers since once traded by the original bond holder the interest earned is 0.5% lower. Less volume of traded bonds mean you might not get good value for selling them. And even if you manage to, you'd have to pay capital gains tax.

Is it good to invest in IIFCL bonds?

For retail investors, our take; avoid investing in IIFCL bonds. The coupon rate of 7.58% may not beat inflation rate in the long term. You will not be able to use the power of compounding as well. In fact debt mutual funds can do a better job for you. For retirees this may look a reasonably decent option in case they have exhausted the limits of senior citizen saving schemes.

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