Should you go for IIFCL (Tranche 2) tax free bonds?

IIFCL opened its issue of tax-free bonds 2012- (Tranche 2) yesterday and the issue closes on 15 March 2013. The issue size is up to Rs 200 crore with an option to retain over-subscription of up to the shelf limit of Rs 6,331.1231 crore. Keep in mind just like the Tranche 1 series, this too 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.)

Features: The face value 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 (Tranche 2 - Series 1), 15 years tenure (Tranche 2 - Series 2) and (Tranche 2 - Series 3).

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[caption id=“attachment_640572” align=“alignleft” width=“380”] In Tranche 2 series, as a retail investor you can earn up to 7.36 percent. Moneycontrol.com[/caption]

And the company is offering an annual coupon rate of 7.36 percent, 7.52 percent and 7.58 percent, respectively. As a retail investor, you will get extra 50 basis points (bps).

The Tranche 1 series that came out in January had offered an annual coupon rate of 7.19 percent, 7.36 percent and 7.40 percent, respectively.

In Tranche 2 series, as a retail investor you can earn up to 7.36 percent, 7.52 percent and 7.58 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.

Ratings: ICRA , 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: You can hold the bond in both, physical as well as demat form. But, if you plan to trade the bond, it has to be in a demat form. The bond has a market lot/ trading lot of one bond.

Tax: 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 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 bought it later in the secondary market, the coupon rate will be lower by 50 bps then the applicable coupon rate for the retail investor.

Should you invest?

These bonds are offering fairly good amount of returns that too tax-free. Hence 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 will work well especially for those in the highest tax bracket. In fact, the rate of interest is higher than the trench 1 bonds. These bonds may probably be your last chance to get locked in at higher interest rate, especially for those who want to invest for the long term.

Do look at other investments avenue of PPF which offers 8.6 percent tax-free returns before investing in these bonds. This week Hudco also came out with their Tranche 2 bonds, read about them here .