Investing It!

NHAI Tax Free Bond

 

Issue Opens 28 Dec 2011; Issue Closes on 11 Jan 2012

 

Another two months of 2012 is going to be very hectic for investors as its time to file tax returns. Everybody is juggling with ideas to save tax. Various companies are also coming out with different tax saving products (infrastructure bonds, tax saving bonds). Issues of IDFC and L&T infrastructure bonds just closed and if you have missed investing in them for tax saving purpose, here is another opportunity being presented to you in the form of NHAI (National Highway Authority of India) tax free bonds. Infrastructure bonds have a limit of tax exemption as interest income after initial investment of 20000 is taxable. NHAI Bond issue comes to the rescue as the income by way of interest on these bonds will be fully exempt from Income Tax having tax benefits u/s 10 (15) (iv) (h) of IT Act, 1961 and hence would not form a part of taxable income. It’s a great opportunity for risk averse investors and they should consider investing in this option. Let’s analyze all the important features of the issue.

 

What are Bonds?

 

A bond is a security offered by the government, an agency or a corporation wherein issuer essentially takes out a loan from bond buyers for a fixed period. Like all loans, the bond has a particular interest or coupon rate set and over the period of the bond's existence the interest is paid to the bond holder and at the end of bond period the issuer must pay back the principal.

 

Key Features of the NHAI Tax Free Bond

 

NHAI Tax Free Bond

 

Features

Issue Dates

Open 28 Dec 2011, Close 11 Jan 2012

Application Form

Available in Dmat and Paper format

Credit Rating

CRISIL ,CARE and Fitch - (AAA/stable)

Interest on Application Money if no allotment

4%

Bondholder Claim

Superior to any unsecured creditor

Face Value (1 Bond)

Rs 1000

Minimum Investment

50 Bonds (Rs 50000)

Listing On Stock Exchange

BSE

Trading

Dmat format only

Coupon/Interest Rate (per annum) and Tenure

8.2% (10 years), 8.3% (15 Years)

Interest Payment

Annually

Who can Apply

Almost everybody (individuals, companies, corporate, cooperatives, mutual fund hoses, insurance companies etc.)

Allotment Procedure

First come First serve basis

 

Why should you invest in NHAI Tax Free Bond?

 

There are five features related to security and returns which makes this issue attractive –

  1. This issue is placed by NHAI an Autonomous authority of the Government of India under the Ministry of Road Transport and Highways whose financial performance is good and has the backing of Government of India making this pretty safe investment.
  2. The rating which this issue has received from rating agencies certifies that NHAI is pretty secure in terms of servicing its debt obligations.
  3. Tax benefit which is associated with this issue makes it very attractive. The whole of the interest income is tax exempt and there is no cap on it like infrastructure bonds. So, we believe that's a very attractive option. Mind it – Only interest income is tax exempt and you will have to pay full tax on the principle you invest in the issue.
  4. The coupon rate of 8.2% is quite competitive once you take tax benefits into consideration. If you compare the interest rate with taxable bond, for a person who is in 30% marginal tax bracket, 8.2% would be equivalent to more than 11.7%.
  5. As the issue will be traded on BSE it will be highly liquid and when somebody wants to get out prematurely he can liquidate his position easily.

 

How appropriate this investment option is?

 

As the interest income of NHAI bonds is tax exempt the effective return on this investment will be same as the coupon rate being offered on them (8.2% or 8.3%). Taking tax factor into consideration it will be on the higher side as compared to safer investment options like PPF, NSC, Fixed deposit etc. Another area where this offer clearly beats the above options is the Liquidity factor. As it will be traded in secondary market (BSE) it will be highly liquid as compared to above options.

 

Author

 

Bimlesh Singh

Published Jan 09 2012

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