With 9% returns, you can't ignore NHB's tax-free bonds

The National Housing Bank, an entity wholly owned by the Reserve Bank of India (RBI), opens its tax-free bondissueon 30 December and closes on 31 January, 2014. The apex bank for housing finance companies aims to raise Rs 2,100 crore (shelf limit) through this issue. The funds will be used to mobilise long-term resources for funding financial assistance for housing. The bonds are secured redeemable non-convertible debentures and do not have call or put options.




The face value is Rs 5,000 per bond and the minimum amount of application is Rs 5,000. The bond is available in three tenures - 10 years, 15 years and 20 years. The annual coupon rates are 8.26 percent, and 8.63 percent and 8.76 percent, respectively. For retail investors, the coupon rates are 25 basis points (bps) higher at 8.51 percent, 8.88 percent and 9.01 percent. The annualised yield for retail investors is also the same.


CRISIL, CARE, ICRA have assigned AAA (Stable) rating on the bonds. Also remember that since NHB is wholly owned by the RBI, you need not worry about default risk.

Finer details:

You can hold the bond in both physical and demat form. But, if you plan to trade the bond, it has to be in a demat form. The National Stock Exchange (NSE) is the designated stock exchange for the issue. As much as 40 percent of the issue is reserved for retail investors.


Interest from the bond does not form part of total income, and hence it's a tax-free bond. But, when you sell the bond on the exchange, you will have to pay capital gains tax. If you sell the bond after 12 months, the capital gain will be calculated as per 10 percent without indexation.

Should you invest?

The return being offered is pretty good. Since it is tax free, the return you earn on this bond is better than what you would have earned on a fixed deposit (around 6.04 percent post-tax for those in the highest tax bracket if FD rate is 8.75 percent).

"This bond will work well especially for those in the highest tax bracket who want to invest for the long term," saysParag Paranjpe, Certified Financial Planner, Think Consultants.

Keep in mind that these bonds have long lock-in periods of 10, 15 and 20 years. Of course, you will be able to trade these bonds on the exchange but getting a buyer may turn out to be difficult as it depends on the market conditions then.

So liquidity could be an issue, just in case you need funds before the tenure of the bond is over. Before investing in these bonds, do look into your long-term fixed income allocation. "PPF is currently offering 8.7 percent, and the rate will increase in April due to high inflation. But with PPF, the maximum you can invest is only Rs 1 lakh per financial year. With PPF you could make partial withdrawals after the stipulates period is over or even avail a loan against it," Paranjpe says.

We think, once you have exhausted your PPF and EPF, you could look into investing in these bonds. We highly recommend these bonds for risk-averse, long-term investors. You can read the bond prospectus here. To know more about tax-free bonds in general, read thisFirstpost article.

Published Date: Dec 27, 2013 03:36 pm | Updated Date: Dec 21, 2014 04:01 am

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