National Highways Authority of India’s ongoing tax-free bond issuance may be a befitting end to this year of debt. Sources involved with the issuesay it has been subscribed to the tune of more than Rs 20,000 crore. Tomorrow may, therefore, be the last chance for retail investors to partake in the issue.
Investors who missed this issue can take heart, though. For, Power Finance Company (PFC) is opening its issue on Friday. PFC is offering similar rates as NHAI: Annual tax-free returns of 8.2 and 8.3 per cent for 10 and 15 years, respectively. The minimum investment will, however, be lower at Rs 10,000, as against NHAI's Rs 50,000.
Do not confuse these issues with tax-saving bond by the likes of IDFC and L&T. The tax-saving bonds allow investors to claim a deduction of up to Rs 20,000 under Section 80CCF. But the interest earned thereon is taxable. In the case of NHAI bonds, there is no deduction on the principal available. However, the interest earned will be completely tax-free under Section 10(15)(iv)(h).
| A WORLD OF DIFFERENCE | ||
| Tax-free bonds | Tax-saving bonds | |
| Deduction of principal | — | Up to Rs 20,000 under Sec 80CCF |
| Tax on interest earned | None | Taxed at slab rate applicable |
| Minimum investment | Rs 10,000- | Rs 5,000-10,000 |
| 50,000 | ||
| Returns offered (%) | 8.2 - 8.3 | 9 |
| Post-tax returns (%, @30.9%) | 8.2 - 8.3 | 6.22 |
| Lock-in period Exit route | None Sell on stock exchanges | Five years exchanges post lock- in / buyback offer |
Let's say you invest Rs 50,000 for a 10-year tenure. You will earn Rs 4,100 annually (there is no cumulative interest option), that is Rs 41,000 over 10 years, entirely tax-free. Compare this with a 10-year bank fixed deposit. State Bank of India (SBI) is currently offering 9.25 per cent return annually. For the same investment amount, here you will earn Rs 4,625 yearly. However, this will be taxable. For those in the highest tax bracket, the return in hand after deducting tax will be Rs 3,196, almost Rs 1,000 less than that earned from NHAI bonds.
Certified financial planner Suresh Sadagopan is advising clients falling in the highest tax bracket to consider the issue. Even those looking at fixed income investments from an asset allocation perspective can consider this. Especially since the rates will be locked in at investment. Unlike other small savings instruments like Public Provident Fund (PPF), Post Office Monthly Income Schemes and National Savings Certificates that have been linked to 5- or 10-year government bond yields and will, as a result, vary every year.
So, though an 8.6 per cent annual tax-free return on PPF with or without the tax deduction sounds enticing, it may not be offered from next year. More, with talk of the interest-rate cycle having peaked, rates may start sliding.
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Also, PPF is quite illiquid, with a lock-in of six years and even post that, the withdrawal amounts allowed every year are capped. Comparatively, NHAI bonds will be liquid, as they will be listed on the exchanges, providing investors an exit route, according to Rishi Nathany, CEO, Dalmia Securities. That is, there is no lock-in period. If these bonds list at a premium, one can cash on the listing gains as well. But, this is not advisable for long-term investors.
Plus, once the rate cycle reverses, there may be a higher demand for these bonds and there will be scope for capital appreciation.
One can even consider making trading gains by exiting the bonds mid-way. Be careful, though, as there will be a capital gains tax in this case.
If the bonds are sold within a year, then the gains will be added to your income and taxed. If held for more than a year before sale, the capital gains will be taxed at 10 per cent without indexation or 20 per cent with indexation.