IRFC Tax Free Bonds: Should you subscribe?

Business

oi-Sneha

By Sneha B K

Published: Monday, January 21, 2013, 9:22 [IST]

Indian Railway Finance Corporation Limited (IRFC) will raise over Rs 8,886 crore through tax-free bonds which will open for subscription on January 21. This will be the second issue by IRFC, first tax-free bonds was issued last year.

The funds raised through this issue will be utilized towards financing the acquisition of rolling stock which will be leased to the Railway Ministry in line with present business activities.

Duration:

The issue is open from January 21 to January 29.

The minimum amount of application is Rs 5,000 with face value of Rs 1,000 per bond. The allotment will be made on first-come-first-serve basis.

Interest rate:

For retail investors, bond will carry a coupon rate of 7.68% per annum for the for 10 years and 7.84%per annum for the 15 years.

In case of qualified institutional buyers, non-institutional investors and high networth individuals, the interest rate stands at 7.18 per cent for 10 years and 7.34 per cent for 15 years.

The additional incentive of 0.50% will be payable for retail investors for amount more than Rs 10 lakh.

Tax benefit:

Interest earned on these bonds are tax free and do not form part of the total income. However, there is no tax benefit on the principal amount of the investment. TDS will not be applicable in these case.

Should you subscribe?

If you look at the coupon rates of IRFC, then they are far from attractive, considering that the ongoing HUDCO Bonds (last day for subscribing today) is offering rates of as much as 8.01 for retail investors for its 15 year option. In fact, they are lower than IIFCL and REC, which came out with offerings recently. However, if you are in the 20 to 30 per cent tax bracket these bonds make sense since the post tax yield works between 9 and 11 per cent.

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