Fintotal News Analysis | NHPC Tax Free Bonds-Tranche 1 October 2013-Analysis for Retail Investors
NHPC Tax Free Bonds-Tranche 1 October 2013-Analysis for Retail Investors
Kirti Kulkarni, 16 Oct 2013

After REC, HUDCO, IIFCL and PFC, NHPC is the fifth company to issue tax-free bonds in this financial year. NHPCs offer of tax-free bonds is open for subscription between 18 October 2013 and 11 November 2013.

Why is NHPC issuing bonds?

NHPC is a Govt. of India Enterprise. It has an objective to plan, promote and organize an integrated and efficient development of hydroelectric power in all aspects. It has later on expanded its objects to include development of power in all its aspects through conventional and non-conventional sources in India and abroad. Some of its funds are being raised from the market in the form of bonds. NHPC will raise about Rs 1,000 crores in tranche 1 of these series.

Are NHPC bonds safe?

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

What are the returns in NHPC bonds?

Coupon rate: 10 years bonds- 8.43%, 15 years bonds- 8.79%, 20 years bonds- 8.92%. 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 NHPC bonds just like IIFCL bonds.

How to apply for NHPC Bonds?

Application of NHPC bonds can be made in both physical and demat form. Application can also be made in ASBA or non-ASBA mode.Applications should be made only in the prescribed Application Form. You can download the forms or apply online through A K Capital Services and Axis Capital.

What really is tax-free in NHPC 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 NHPC 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 NHPC 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 NHPC tranche 1 bond comes to 11.15% for those in 20% tax bracket and 12.74% 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 8.92% 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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