Should you invest in IIFCL tax free bonds?

It’s raining tax free bonds. Earlier this month, Rural Electrification Corp and Power Finance Corp, launched it tax-free bond issue. Yesterday, Indian Infrastructure Finance Company Limited (IIFCL) launched its tax-free bond issue. IIFCL finances infrastructure projects in sectors like power, roads, highways, ports, airports, renewable energy and urban infrastructure.

[caption id=“attachment_562993” align=“alignleft” width=“380”]  IIFCL is planning a public issue of bonds to raise Rs 1,500 crores with a green-shoe option to retain up to Rs 9,215 crores. Moneycontrol.com[/caption]

What is the issue amount

IIFCL is planning a public issue of bonds to raise Rs 1,500 crores with a green-shoe option to retain up to Rs 9,215 crores. The issue will be on first-come first served basis and will remain open from 26 December 2012 to 11 January 2013.

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Features

The face value of is Rs 1,000 per bond and the minimum amount of application is Rs 5,000. The bond is available in three series-10 years tenure (Trench 1 - Series 1), 15 years tenure (Trench 1 - Series 2) and (Trench 1 - Series 3).

And, the company is offering an annual coupon rate of 7.19 percent, 7.36 percent and 7.40 percent, respectively. As a retail investor you will get extra 50 basis points (bps).

So, as retail investors you can earn up to 7.69 percent, 7.86 percent and 7.90 percent. While the annualised yield for retail investors is also the same. As much as 40 percent of the issue is reserved for retail investors. This is a secured redeemable non-convertible bond and does not come with neither call nor put option. There is a ceiling on coupon rates based on the reference government securities (G-Sec rates.)

Ratings

ICRA Ltd, Brickworks and CARE have assigned AAA (Stable) to the bonds. Also, IIFCI is a government of India enterprise. Hence, the default risk is minimum.

Finer Details

The bond is issued in both, physical as well as demat form. Trading of the bond is permitted only in the demat form and comes with a market lot/ trading lot of one bond. Interest from the bond does not form part of total income, and hence it’s a tax-free bond.

However, keep in mind that when you sell the bond on the exchange, you will have to pay capital gains tax. If you sell the bond post 12 months, the capital gain will be calculated as per 10 percent without indexation. If you are not the original allottees of the bond and get transferred/ buy it later in the secondary market, you will get a coupon rate lowered by 50 bps then the applicable coupon rate for the retail investor.

Should you invest?

Since these are tax-free bonds, the post-tax returns you earn on these bonds are better than what you would have earned for fixed deposits (around 6.9 percent post-tax for those in the highest tax bracket if FD rate is 9.50 percent). “These bonds are a good tool for those in the highest tax bracket. Also, interest rates are expected to move downwards from January. This is a good time to get locked at higher interest rate, for those who want to invest for the long term,“said Pankaj Mathpal, Mumbai-based, Certified Financial Planner.

Keep in mind, that these bonds are for those who are in the highest tax bracket and want a long-term investment because they offer a 50 bps lower rate for those buying the bond from the exchange. So you may not have buyer as per your wish, which means lower liquidity. Look at asset allocation before investing, and once you have exhausted the PPF (8.8 percent tax free) limits.