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Rs.40,000 crores worth Tax-free bonds announced

The hugely popular tax-free bonds make a comeback this year, after a gap of one long year.

Pursuant to the announcement made in the budget early this year in February, the Finance Ministry has now granted permission to 7 companies in the public sector, to raise funds via tax-free bonds during FY 2015-16.

These seven Public Sector Undertakings (PSUs), who have been allowed to issue tax-free bonds, are listed below:

1. National Highways Authority of India (NHAI) : Rs.24,000 crores
2. Indian Railway Finance Corporation (IRFC) : Rs.6,000 crores
3. Housing and Urban Development Corporation (HUDCO) : Rs.5,000 crores
4. Indian Renewable Energy Development Agency (IREDA) : Rs.2,000 crores
5. Power Finance Corporation (PFC) : Rs.1,000 crores
6. Rural Electrification Corporation (REC) : Rs.1,000 crores
7. National Thermal Power Corporation (NTPC) : Rs.1,000 crores

While each company would now take steps, to finalize the specific terms on which to issue such bonds, the general terms and conditions would typically be as under:

- The maturity of these bonds would be 10, 15 and 20 years.

- As the name suggests, the interest that you earn would be tax free.

- However, you must note that, capital gains on sale of these bonds is TAXABLE.

- Those investing up to Rs.10 lakhs would be classified as individual investors. 

- Investments above Rs.10 lakhs would come under the HNI category.

- NRIs too can invest in these tax-free bonds.

Coming to the all-important interest rate:
The rate of interest is linked to the market rates of the government securities (G Secs), of similar maturity, prevailing around the time of public issue. As per the guidelines issued

- Triple A rated borrowers have to offer 0.55% lower rate than the market rate on G Secs
- AA+ rated borrowers can offer an additional 0.10% over the above rate
- AA- rated borrowers can offer an additional 0.20%

Accordingly, based on current market conditions, the interest rate is expected to be in the range of 7.25-7.50% per annum.

This, of course, is for the Retail Investors. 

Tax-free bonds issued to the institutional investors have to be at 0.80% less than the market rate on G Secs. 

Very Important
In case you missed my blog post Why tax-free bonds don't excite me?, you must definitely read it before you invest in the above-mentioned tax-free bonds.

As I have explained in details therein, there is a far better alternative available in the market.

Of course, given the total lack of understanding and faith in the mutual funds, public issues of these tax-free bonds would easily be a resounding success.

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