Very warm Christmas wishes to one and all!!
National Housing Bank (NHB) has decided to play Santa this Christmas and has announced an issue of tax free bonds with coupon/ interest rates as under:
|
10 year |
15 Year |
20 year |
|
8.51% p.a. |
8.88% p.a. |
9.01% p.a. |
We have always endorsed tax free bonds and the love story continues for this issue as well for multiple reasons:
· First issue of AAA rated tax free bonds, makes them at par to Government security
· First “AAA” rated PSU company offering 9% interest. Last issue (HUDCO) offering 9% was AA rated.
· Interest rates showing signs of softening. 10 yr G-Sec (Government securities) yield has dropped ever since new G-Secs have been announced. Thus this could well be the last issue with interest rate pegged @ 9%. This is because interest rate on tax free bonds are linked to G-Secs.
· In addition to earnings on account rate of interest, these bonds also give opportunity for capital appreciation/ price appreciation as they shall be listed on stock exchange. Hence, once the interest rates soften over the next 18-24 months, these bonds could offer effective return as high as 12 - 15% approx. However, you should have patience to hold the bonds for 24-30 months. Further, investors who hold the bonds to maturity shall not get any capital appreciation.
· RBI has kept Repo rate unchanged in its current policy as inflation showed sign of softening. Unless, inflation or other factors play party spoiler, RBI is expected to cool off interest rates in the next 3 – 6 months so as to encourage growth. Bond prices shall go up when rates fall.
· Since interest earned is tax free, no tax is deducted/ to be paid unlike FDs where TDS is deducted. Further even where these bonds are omitted to be mentioned in income tax returns there shall be no consequences.
|
Fix. Deposit |
Tax free bond |
|
|
Pre tax Interest |
9.5% - 10% p.a. |
8.51% - 9.01% p.a. |
|
Post Tax Return |
8.52 – 8.97% p.a. |
8.51 - 9.01% p.a. |
|
Post Tax Return |
6.57 – 6.91% p.a. |
8.51 - 9.01% p.a. |
· Amount of subscription to tax free bonds is not eligible for deduction u/s 80C. Capital appreciation shall be taxable as short term (if sold within 1 yr) or long term capital gains.
· These are however not recommended for short term investors with outlook of upto 1 year. Such investors should invest in short term funds, which are delivering a return of about 8 – 8.5% p.a.. However as there is no lock-in period in case of such funds, the interest rates are non-committal and react immediately to market interest rates.
· Bonds can be held in physical or demat mode. However, demat mode recommended.
· Allotment shall be on first come first serve basis in case of over-subscription. Issue opens on 30th December.
By: Ashish Kedia
CAclubindia
