Power Finance Tax Free Bonds; should you subscribe?

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 Power Finance Tax Free Bonds; should you subscribe?
Power Finance Corporation's (PFC) tax free bonds open for subscription today (Feb 18). This bond offering is perhaps a tax free offering that offers the lowest interest rate one can recall, when comparing it to other companies that have had similar offers in recent times.

In case of series 1, the interest rate being offered is 7.38 per cent for retail investors & HUFs (which are applying for an amount aggregating upto and including Rs 10 lakh across all series of bonds in the issue) and 6.88 percent for other investors. In the case of series 2, retail investors & HUFs will be offered interest rate of 7.54 percent and other investors at 7.04 percent.

Now, it's important to remember that these are tax free bonds. So, the income earned from these bonds would not be added to total income while computing tax liability.

If you are in the 30 per cent tax bracket, your post tax returns would work to slightly more than 10 per cent, which is higher than what banks and institutions are currently offering. If you are in the 20 per cent and 10 per cent tax bracket your returns would work out to 9.1 and 8.2 per cent respectively. It's best if you are in these two brackets to skip the issue, as you could get higher post tax returns elsewhere.

Power Finance Corporation plans to raise around Rs 5,000 crore through these bonds. It maybe recalled that PFC already raised Rs 699.75 crore earlier in December.

The bonds offer great safety and are assigned CARE assigned a rating of AAA. Apart from this the institution is a government owned entity and it's relatively safe in that context.

The issue will close for subscription on march 15 and the minimum size one can apply through these bonds is for Rs 5000.


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