A series of rate cuts and liquidity injection measures by RBI to support growth has reduced the attractiveness of fixed income products. Bank deposit rates have touched record lows with reputed lenders like SBI, HDFC and ICICI now offering 4.5-4.9% interest on deposits of up to 2 years. Moreover, debt funds such as liquid, ultra short-term and money market funds have also been delivering pre-tax returns of 4-5.5% returns.
In such a scenario, tax-free bonds have emerged as an investment product that offers superior risk-adjusted returns with little volatility and adequate liquidity. Currently, these bonds offer annual return of 4-4.5%. Also, as there is no tax on interest earned from them, these are as good as extremely safe fixed income products that offer 7-8% return.
In India, government backed entities like National Highways Authority of India (NHAI), Indian Railway Finance Corporation (IRFC), REC (formerly Rural Electrification Corporation Limited), Power Finance Corporation (PFC), Housing and Urban Development Corporation (HUDCO) and Indian Renewable Energy Development Agency (IREDA) offer tax-free bonds in India. Hence, these bonds are safer compared to other fixed income securities.
|
Name of Security |
Interest Date |
Issue Date |
Maturity Date |
Annualized YTM |
Rating |
|
8.20 % NHAI 2022 |
01-Oct Annual |
25-Jan-12 |
25-Jan-22 |
3.90% |
AAA ( CRISIL & CARE ) |
|
7.93 % REC 2022 |
01-Jul Annual |
27-Mar-12 |
27-Mar-22 |
3.95% |
AAA ( CRISIL & CARE ) |
|
6.88 % (7.38%) REC 2023 |
01-Dec Annual |
25-Mar-13 |
25-Mar-23 |
3.95% |
AAA ( CRISIL & CARE ) |
|
7.18 % REC 2035 |
01-Dec Annual |
5-Nov-15 |
5-Nov-35 |
4.45% |
AAA ( CRISIL & CARE ) |
|
8.66 % IIFCL 2034 |
22-Jan Annual |
22-Jan-14 |
22-Jan-34 |
4.47% |
AAA ( CRISIL & CARE ) |
|
7.17 % IREDA 2025 |
01-Oct Annual |
1-Oct-15 |
1-Oct-25 |
4.52% |
AA+ (ICRA & India Ratings) |
Note - This is an indicative list. The quotes may change by the time of publishing this article.
How to invest?
After financial year 2015-16, government backed entities have stopped issuing tax-free bonds. However, your clients can invest in these bonds just like any other secondary bonds through stock exchanges. You need a broker like JM Financial Services to facilitate these transactions.
Although the interest received from these bonds is non-taxable, any profits derived by selling these bonds in the secondary market are liable to taxes. While capital gains made from selling tax-free bonds within a year is taxed at marginal rate of taxation (depending of income slabs), any long-term capital gain is taxed 10% without indexation and 20% with indexation if you sell these bonds after a year.
Bond selection
There are close to 200 series of tax-free bonds that are listed on the stock exchanges. However, not all of them are traded frequently. Therefore, it is important that you pick tax-free bonds having higher YTM (yield to maturity) and reasonable liquidity.
Benefits
- Tax efficient
- Low risk
- Easy liquidity
- Well regulated
- Ratings by various agencies available
If you wish to empanel with JM Financial Services as Independent Financial Distributors to solicit these products, click here
If you wish to invest in these products, click here
