Retail investors who did not subscribe to the tax-free bonds of Rural Electrification Corporation (REC) and Power Finance Corporation (PFC) earlier this month have another good opportunity. India Infrastructure Finance Company (IIFCL), another Government-controlled company, is issuing tax-free bonds between December 26 and January 11.
Similar to earlier issues, retail investors can invest up to Rs 10 lakh each and will receive 0.5 per cent higher interest than other investor categories.
In addition to the 10-year and 15-year bond options available in earlier issues, IIFCL is issuing 20-year bonds also. For retail investors, the annual interest rates on IIFCL’s 10-year bonds (7.69 per cent) and 15-year bonds (7.86 per cent) are the same as those offered by PFC and slightly lower than those offered by REC.
But the 7.9 per cent annual interest rate on the 20-year bonds is the highest so far.
After-tax return
Retail investors in higher tax brackets can consider applying for IIFCL’s bonds. Being tax-free, the effective returns on these bonds are higher than the after-tax return on bank deposits. For those in the 20 per cent and 30 per cent tax slabs, the maximum rate of 9.5 per cent currently offered on bank deposits translates into an after-tax return of 7.82 per cent and 6.8 per cent, respectively.
This is lower than IIFCL’s 15-year and 20-year bonds . Besides, the bonds are secured to the full extent and have the highest credit rating (AAA). This makes them safer than bank deposits. Rates on future tax-free bonds may be lower. The central bank has indicated that it may moderate policy rates in January. So, investors may be better off locking into the high rates offered by IIFCL.
But before subscribing to IIFCL’s bonds, keep aside money for instruments such as public provident fund (PPF). Better interest rates (currently 8.8 per cent tax-free) and tax deduction up to the maximum investment amount of Rs 1 lakh help PPF score over tax-free bonds.
That said, investors can invest much more in tax-free bonds and interest is paid out annually at the same rate for the entire tenor. Also, unlike PPF which is rather illiquid, investors can sell their IIFCL tax-free bonds on the BSE on which they will be listed. But gains on sale in the secondary market will be subject to capital gains tax.
Also, the benefit of higher interest of 0.5 per cent is available only to those retail investors who are originally allotted bonds at issue. On sale or transfer, the benefit is lost and rates reduce to that applicable for other investors (7.19 per cent for 10-year bonds, 7.36 per cent for 15-year bonds and 7.4 per cent for 20-year bonds).
company details
IIFCL is among the major financiers to various infrastructure projects in the country. As on March 2012, it had disbursed loans of Rs 22,543 crore.
The company has been consistently profitable since its establishment in 2006, and its consolidated profit in FY-12 doubled over the previous year to Rs 678 crore. It did not have any non-performing advances in FY-12.