Fintotal News Analysis | PFC Tax Free Bonds-Tranche 1 October 2013-Analysis for Retail Investors
PFC Tax Free Bonds-Tranche 1 October 2013-Analysis for Retail Investors
Kirti Kulkarni, 15 Oct 2013

It is the season of tax-free bonds from infrastructure companies. PFC is the fourth company to issue in this financial year after REC, HUDCO and IIFCL, whose offer is ongoing. PFCs offer of tax-free bonds is open for subscription between 14 October 2013 and 11 November 2013.

Why is PFC issuing bonds?

PFC is an infrastructure finance company. It provides affordable and competitive products and services with efficient and internationally integrated sourcing and servicing, collaborating the reforms in the Indian Power Sector and promotes efficient investments in the power and allied sectors in India and abroad. Some of its funds are raised from the market in the form of bonds. PFC will raise about Rs 3,875.90 crores in tranche 1 of these series.

Are PFC bonds safe?

Yes, we are quite comfortable with the rating AAA 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- 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?

Yes. NRIs can apply for these bonds with the condition of paying in Indian Rupees at the time of allotment.

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 be made only in the prescribed Application Form. You can download the forms or apply online through SBI Capital Markets, A K Capital Services, ICICI Securities, Edelweiss Fin or Axis Capital.

What really 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. 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 PFC 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 PFC 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 PFC 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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