Tax-free bonds worth Rs 30k cr a bonanza for investors

The tax-free bonds that will be issued by road and infrastructure companies totalling Rs 30,00 crore are likely to carry interest rates of about 7.5-8% with maturities of 10 years, going by the directives issued by the Central Board of Direct Taxes (CBDT).

According to a media report , the CBDT has said the interest rate on bonds should not be less than 100 basis points lower than the yield on government securities of equivalent maturity, as reported by the Fixed Income Money Market and Derivatives Association (FIMMDA) on the last working day of the month preceding the month of issue of bonds.

Such tax-free bonds can be issued to the public or through the private placement route. In the case of a public issue, the interest on bonds should not be less than 50 basis points lower than the yield on government securities of equivalent residual maturity, the CBDT has said.

The tenure of the tax free bonds, which will have to be secured, redeemable and non-convertible, will have to be 10-15 years. Today, the benchmark 10-year bond yield climbed to 8.52%, its highest since 1 October, 2008, over unease at the increased level of government borrowings this financial year. Assuming that government bond yields hover around this rate, the rate of the tax-free bonds are likely to be 50-10 basis points lower at 7.5-8%.

The Central Board of Direct Taxes has also said the National Highways Authority of India and the Indian Railway Finance Corporation had been permitted to issue tax-free bonds of 10,000 crore each in the current financial year ending March 2012. The Housing and Urban Development Corporation and the Power Finance Corporation can issue tax-free bonds for Rs 5,000 crore each.

The finance ministry is hopeful that such tax-free bonds will pave the way for these companies to raise long-term resources for infrastructure development.