Fintotal News Analysis | PFC Tax Free Bonds- February 2013. What is it all about?
PFC Tax Free Bonds- February 2013. What is it all about?
Ruby Jacob, 16 Feb 2013

Power Finance Corporation is back with its second lot of tax free bonds this financial year and this issue will be open from 18 February 2013 to 15 March 2013. PFC had raised funds earlier in December 2012 in tranche 1 of its tax free bonds issue.

Why is PFC issuing bonds?

PFC is a government owned company that finances power sector development activities in the country. It raises money from the market to finance requirements of the Power sector. Some of the financing is done by issuing tax free bonds. PFC will raise about Rs 100 crores in tranche 2 of this series.

Are PFC bonds safe?

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

What are the returns in PFC bonds?

Coupon rate

10 years bonds- 7.38%

15 years bonds- 7.54%

Interest will be paid on the 15th of October every year. If your application is less than Rs 10 lakhs you come under retail category. The 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 PFC tax free bonds, 2013.

How to apply for PFC Bonds?

Application of PFC 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 any of the lead managers SBI Capital Markets, A K Capital Services, Axis Capital, ICICI Securities or Kotak Mahindra Capital.

What is tax free in PFC bonds?

Here is where you need to pay good attention. Firstly it has nothing to do with tax rebate of Sec 80 CCF Infrastructure bonds. Section 80CCF (deduction of Rs 20,000) has been scrapped this year and you will not get any tax rebate on infrastructure bonds like you could get last year. Hence do not fall for this trap.

Now, what is tax free? Income is taxable. Interest is a kind of income and is taxable. For example one earns interest from his fixed deposits with banks and 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 PFC bonds?

No, though the only way to exit is by way of selling it in the secondary market. These bonds are to be listed on BSE where they will be listed. But this does not make the bonds any liquid. Tax free bonds are not freely traded on the exchanges. You might be able to find buyers since once traded by the original bond holder they earn lower interest rate. 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 PFC bonds?

For retail investors, our take: avoid investing in PFC bonds. The coupon rate of 7.54% may not beat inflation rate in the long term. You will not be able to use the power of compounding either since interest is paid out every year. In fact debt mutual funds can do a much better job for you.

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