There were scores of tax free bonds launched during 201-2012, including Hudco, IRFC, Power Finance Corporation, REC and National Highways Authority of India.
GoodReturns.in takes a look at the listing price and the returns from these bonds. Firstly, it must be remembered that income from tax free bonds are free from income tax, which means that interest received from these bonds, do not form part of the total income. Secondly, these are government owned companies and hence relatively secure, unless there is a Greece type crisis and the government goes bankrupt.
Power Finance Corporations
The PFC bonds which came out with a public issue late last year are currently listed on the BSE. The 15 years bonds are listed at Rs 1,026 and the 10 year bonds at Rs 1,018, which is way above the offer price of Rs 1000 per bond. The coupon rates on these bonds is 8.20% for the 10 year bonds and 8.30% for the 15 year bonds. If one were to buy the bonds from the markets the yield is expected to drop and unless you are in the highest tax bracket, the tax free returns are not very appealing.
Housing and Urban Development Corporation (Hudco)
The HUDCO tax free bonds perhaps offer the best yields as the 10 and 15 year bonds are traded below the offer price of Rs 1000 per bond. While the 10 year bond (N3) series is currently listed at a price of Rs 986, the 15 year series is currently listed at Rs 980. Thus, an investor buying these bonds from the market (NSE or BSE), can effectively increase his yields to anywhere between 9 and 11%, if he is in the 20 and 30% tax bracket. The coupon rates on these bonds are 8.1% for the 10 year and 8.2% for the 20 year bond.
Indian Railway Finance corporation
The IRFC bonds are traded way above the offer price and hence the yields on these bonds drop, if one of purchasing them from the BSE or NSE. The bond which was listed earlier this year has the face value of Rs 1,000. While the 15 year bond is traded Rs 1,029, the 10 year bond is traded at Rs 1,036.
REC (Rural Electrification Corporation)
This is was last of the bond issues to have tapped the market in 2011-2012. Since these bonds like HUDCO are traded below the face value of Rs 1000, the yields are higher. The 15 year tax free bonds were trading at around 975 and the 10 year tax free bonds were trading at around 986. These bonds are listed only on the BSE. The coupon rates for those buying from the markets is 7.93% for 10 years and 8.12% for the 15 years bond.