IRFCL Tax Free Bonds: High on safety with good tax free returns

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IRFCL Tax Free Bonds: High on safety with good tax free returns
The Indian Railway Finance Corporation (IRFCL) Tax Free Bonds opens today. The size of the issue is Rs 1500 crores, which makes it a lot bigger than the recent bond offerings from other corporations.

These bond are extremely safe, since they are a part of the Indian Railways and carry a rating of CRISILAAA/Stable' by CRISIL; ‘[ICRA] AAA' by ICRA and ;‘CARE AAA' by CARE indicating at highest degree of safety regarding timely servicing of financial obligations.

Coupon rate

If you are a retail investor and wish to subscribe, the bonds will fetch you an interest rate of 8.44 per cent for 10 years and 8.88 per cent for 15 years.

For non retail investors the interest rates offered are 8.19 per cent for 10 yrs and 8.63 per cent for 15 yrs.

Should you subscribe?

Most of the recent bond offerings have offered interest rate around the same rates as being offered by IIFCL. It's important to remember that the tax free bonds means that interest offered in the hands of investors would be tax free and not added to total income. Also, by investing at the current rates, you are hedging against falling interest rates.

In fact, interest rates may have peaked and they can only head lower from here.
Please note, if you are not going to hold the bonds till maturity, it would be better not to apply for large number of bonds, since these bonds lack liquidity. What this means is that you may not find it easy to sell the large quantity of bonds on the exchanges. The tax free bonds that are currently traded on the exchanges do not have very large liquidity.

In any case, if you are in the 20 and 30 per cent tax bracket, it makes sense to subscribe to these bonds.

Story first published: Friday, February 28, 2014, 11:26 [IST]
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