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IREDA's Tax Free Bonds Public Issue opens this Friday

Given that Indians love safe, assured and tax-free returns, tax free bonds have been a massive success.

So here's more to meet their insatiable appetite. IREDA will be the sixth company, out of the seven permitted to do so, to offer Tax Free Bonds.

Till date NTPC, PFC, REC and IRFC have issued their full quota of tax free bonds, while NHAI has issued its 1st Tranche. After the IREDA issue, only the 2nd tranche from NHAI and HUDCO bonds would remain to be issued in the current financial year.

IREDA's Public Issue of Tax Free Bonds

IREDA (Indian Renewable Energy Development Agency), a Govt. of India enterprise, has announced the public issue of its Tax Free Secured Redeemable Non-Convertible Bonds, for the financial year 2015-16. 

Details of the same are as under:

Bond Tenure : 10 years, 15 years and 20 years
Face value : Rs.1,000 per bond
Minimum subscription : Rs.5,000 (5 bonds of Rs.1,000 each)
Issue period : Jan 8 to 22, 2016 (with an option for early closure or extension)

Rate of interest
Retail Investors : 10-yr bonds - 7.53%. 15-yr bonds - 7.74%. 20-yr bonds - 7.68%.
Other Investors : 10-yr bonds - 7.28%. 15-yr bonds - 7.49%. 20-yr bonds - 7.43%.
Interest payment : Payable annually

Retail Investors : Individuals and HUFs investing up to Rs.10 lakhs.
High Net Worth Individuals : Individuals and HUFs investing more than Rs.10 lakhs.
(Note: NRIs are not eligible to apply for these bonds.)

Should you invest in the IREDA's Public Issue of Tax Free Bonds FY 15-16?

Issue size : Total size (including oversubsciption) = Rs.1,716 crores.
Allotment : 40% of the issue size is reserved for retail investors, which would be allotted on 'First Come First Serve' basis

Rating : ICRA AA+ and IRRPL AA+ [This issue is one rating lower than the AAA-rated issues in the past. However, it still indicates high degree of safety regarding timely servicing of financial obligations. Such instruments carry very low credit risk.]

Liquidity : To be listed on BSE only
Loan : Borrowing permitted by pledging these bonds
Put / Call : No put or call option
Form : Both in Physical and Dematerialized form
Nomination : Allowed

Permanent Account Number (PAN) : Mandatory

1. Liquidity: Since trading in bonds is normally not very active, one cannot expect too much liquidity when listed. Therefore, if you can afford to lock-in your money for 10 to 20 years, such bonds are a good choice to earn tax-free income. This bond may not be as liquid as the NHAI tax free bonds, which had a massive issue size.

2. Taxation: The tax-free aspect is for the interest income only. Therefore,
a) investment in these bonds does NOT qualify for deduction u/s 80C; and 
b) if you sell before maturity, the capital gains will be taxable.

Short-term capital gains (holding period up to 12 months) will be added to your income and taxed as per your slab rate. Long term capital gains (holding period more than 12 months) will be taxed @10%. These bonds are NOT eligible for indexation benefit.

Interest rates on tax-free bonds are fixed, based on the G-Sec (Govt. Securities) interest rates prevailing around the time of the public issue.

Despite the policy interest rate cut of 0.5% announced by RBI in Sept, there hasn't been any significant drop in the market interest rates. Therefore, the interest rates offered on various tax free bonds issued this year, have more or less been in the same range.

This was reflected in the fact that, the previous issue from NHAI, had slightly higher interest rates of 7.39% and 7.60% as compared to NTPC / PFC (7.36% and 7.53%), IRFC (7.32% and 7.53%) and REC (7.14% and 7.34%).

IREDA's issue is still priced higher, due to the fact that it is a AA-rated issue as compared to AAA-rating enjoyed by previous issues. As per rules, AA-rated companies can offer 0.10% higher rates than AAA-rated issues.

The rate reduction by RBI was quite significant. Hence, no further moderation in interest rates is expected in the next few months. As such, the future issues of tax free bonds would most probably be offered at around the same rates as the recent issues. However, if the banks drop their base rates or the Govt reduces the interest rate on Small Saving Schemes, then the G-Sec rates would also drop. 

This could result in lower interest rates on future issues of tax free bonds.

From the point of view of interest rates, this could more or less be the peak rate.

However, from the liquidity point of view, Tranche 2 of NHAI and HUDCO would be a better bet, as they would be much larger in size than the IREDA issue.

As such, only if you can "invest and forget", you may consider investing in IREDA tax free bonds. Or else, you can wait for the NHAI and HUDCO issues (but maybe compromise slightly on the interest rates.)

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