IRFC Tax Free Bonds 2015-2016 : Public Issues Details & Review

The Central Board of Direct Taxes (CBDT) has issued a notification related to ‘new Tax Free Bonds FY 2015-16’ in the month of July 2015. As per this notification, Tax Free Bonds (TFBs) to the tune of Rs 40,000 crore, will hit the market in this Financial Year (2015-16). IRFC Tax Free Bonds is the latest issue which is going to be open for subscription from 8th December 2015 to 21st December 2015.

During the last few months, NTPC (National Thermal Power Corp), PFC (Power Finance Corporation) and REC (Rural Electrification Corp) have come up with Tax Free Bond issues. All these issues were oversubscribed.

What are Tax-Free Bonds?

Let us first understand, what is a Bond?

A bond is a Fixed Income security (debt investment) in which an investor loans money to an entity (typically corporate or governmental / PSUs) which borrows the funds for a defined period(tenure)of time at a variable or fixed interest rate (coupon rate).

Those bonds which are exempt from taxation on the ‘interest income’ under the Income Tax Act, 1961 are called Tax-free bonds. These are usually issued by government-backed entities.

IRFC Company Profile

• IRFC was incorporated as a financing arm of Indian Railways, for the purpose of raising the necessary resources for meeting the developmental needs of the Indian Railways.
• 100% shareholding held by Government of India as on March 31, 2015.
• IRFC does not have any Non Performing Assets (as of March 31, 2015).
• The net-worth of the company is at Rs 9,115 cr as on 30th Sep, 2015.
• The Company’s net profit has increased from Rs 485 cr in Financial Year 2011 to Rs 758.30 crore in FY 2015.

Latest IRFC Tax Free Bonds March 2016 Issue

Below are the features and key highlights of IRFC Tax Free Bonds issue;

• Bonds Issue opens on : 10th March, 2016.
• Issue closes on : 14th March, 2016.
• Issue size including over-subscription: Rs 2,450 crore (max). The size of the issue is smaller when compared to IRFC’s last issue of Rs 4,532 crore.
• Basis of Allotment : For Retail Individual Investor – 60% of the Issue Size
• Face Value : Rs 1,000 per bond.
• What is the minimum application size? : 5 bonds (Rs 5,000) per individual and in the multiple of 1 bond (Rs 1,000) thereafter.
• What is the maximum application size? : The maximum amount that an individual can apply is Rs 10 Lakh (Retail Category).
• IRFC Tax free bonds are proposed to be listed on BSE (Bombay Stock Exchange) and NSE (National Stock Exchange).
• Credit Rating : “CRISIL AAA/Stable” by CRISIL, “[ICRA] AAA” by ICRA & “CARE AAA” by CARE (The bonds with such ratings are considered to have high degree of safety regarding timely servicing of financial obligations and carry very low credit risk.)
• Allotment is done based on ‘first come first serve’ basis.
• There is no put or call option in the issue.
• Can NRIs apply for IRFC Tax free bonds? – NRIs (Non-Resident Indians) are eligible for subscription. NRI can apply on a repatriable as well as non-repatriable basis, except following categories of investors;
  • Investor who is based in the United States of America, (“USA”),and/or,
  • Domiciled in the USA, and/or,
  • Residents/citizens of the USA, and/or,
  • Who are subject to any taxation laws of the USA.

• Frequency of interest payment is Annual.
• These instruments are classified as Tax free, secured, redeemable and non-convertible bonds in the nature of debentures.
• Date of first Interest Payment : First Interest Payment date is on October 15, 2016 and subsequently on October 15 of every year.
• NSDL and CDSL are the depositories to the Issue.
• Bonds are available in D-mat form only.

Coupon Rates on March 2016 IRFC Tax Free Bonds

Below are the interest (coupon) rates that are offered for retail investors. Retail Option is for individuals whose application is for Rs 10 lakh or less ;

• On 10 year duration bonds the Coupon rate is 7.29%.
• On 15 year duration bonds the Coupon rate offered is 7.64%.

20 year duration bonds are not offered in the March 2016 public issue.

(Investors who apply for bonds worth above Rs 10 Lakh & also NRIs would get 7.04% on 10 year bonds & 7.35% on a 15 year bond.)

IRFC Tax Free Bonds 2015

Below are the features and key highlights of IRFC Tax Free Bonds issue;

• Bonds Issue opens on : 8th Dec, 2015.
• Issue closes on : 21st Dec, 2015.
• Issue size including over-subscription: Rs 4,532 crore (max). The size of the issue is large when compared to REC’s last issue of Rs 700 crore.
• Basis of Allotment : For Retail Individual Investor – 40% of the Issue Size
• Face Value : Rs 1,000 per bond.
• What is the minimum application size? : 5 bonds (Rs 5,000) per individual and in the multiple of 1 bond (Rs 1,000) thereafter.
• What is the maximum application size? : The maximum amount that an individual can apply is Rs 10 Lakh (Retail Category).
• IRFC Tax free bonds are proposed to be listed on BSE (Bombay Stock Exchange) and NSE (National Stock Exchange).
• Credit Rating : “CRISIL AAA/Stable” by CRISIL, “[ICRA] AAA” by ICRA & “CARE AAA” by CARE (The bonds with such ratings are considered to have high degree of safety regarding timely servicing of financial obligations and carry very low credit risk.)
• Allotment is done based on ‘first come first serve’ basis.
• There is no put or call option in the issue.
• Can NRIs apply for IRFC Tax free bonds? – NRIs (Non-Resident Indians) are eligible for subscription. NRI can apply on a repatriable as well as non-repatriable basis, except following categories of investors;
  • Investor who is based in the United States of America, (“USA”),and/or,
  • Domiciled in the USA, and/or,
  • Residents/citizens of the USA, and/or,
  • Who are subject to any taxation laws of the USA.

• Frequency of interest payment is Annual.
• These instruments are classified as Tax free, secured, redeemable and non-convertible bonds in the nature of debentures.
• Date of first Interest Payment : First Interest Payment date is on October 15, 2016 and subsequently on October 15 of every year.
• NSDL and CDSL are the depositories to the Issue.

Coupon Rates of IRFC Tax Free Bonds 2015

Below are the interest (coupon) rates that are offered for retail investors. Retail Option is for individuals whose application is for Rs 10 lakh or less ;

• On 10 year duration bonds the Coupon rate is 7.32%.
• On 15 year duration bonds the Coupon rate offered is 7.53%.
• On 20 year duration bonds the Interest rate is 7.50%.

(Investors who apply for bonds worth above Rs 10 Lakh & also NRIs would get 0.25% less interest rate when compared to the above rates.)

How to apply for / invest in IRFC Tax Free Bonds 2015?

• Unlike NTPC Tax-Free Bonds, IRFC Tax-Free Bonds will also be issued in Physical Form i.e. you can subscribe either in Physical or Demat mode. But, the trading mode is in dematerialized form only.
• Cheques should be drawn in favor of “IRFC Tax Free Bonds 2015 – Escrow Account – R”.
• NRI applicants should draw cheques in favor of ;
  • If on repatriation basis: “IRFC Tax Free Bonds 2015 – Escrow Account – NR Repat”.
  • If on non-repatriation basis “IRFC Tax Free Bonds 2015 – Escrow Account – NR Non-Repat”.
• Applicants Seeking Allotment of The Bonds In Physical form should submit below documents along with application form;
  • Self-attested copy of PAN card.
  • Self-attested copy of proof of residence.
  • Self-attested copy of a cancelled cheque of the bank account to which the amounts pertaining to payment of refunds, interest and redemption, as applicable, should be credited.

Tax Free Bonds & Tax Implications

• Interest income earned on Tax free bonds is exempted from taxes. Since the interest income on the bonds is exempt, no Tax Deduction at Source (TDS) is required. Although, the interest received on TFBs is exempted, the investor would still be required to disclose it in his/her Income Tax Return as an ‘exempted income’. 

• Tax free bonds are not eligible for deduction under section 80c.

• Are Capital Gains taxes applicable on Tax free bonds? – Though the interest earned on these bonds is tax-free, any capital gain from sale in the secondary market is taxable. If you sell your Bond for a price that is more than the cost then you would have to consider this as a capital gain. Short-term capital gains from sale of tax-free bonds on exchanges are taxed at your income tax slab rate, while long-term capital gains are taxed at 10% without indexation.

• The indexation benefit is not available for Bonds/NCDs (Non Convertible Debentures). (For STCG holding period is less than 12 months. For LTCG holding period should be more than 12 months.)

My opinion on IRFC Tax Free Bonds 2015 issue

• It is advisable to follow the principle –Think beyond taxes when investing. Do not invest in Tax-Free bonds just because the interest income is tax free. Your investment should match your financial goals requirements.
• If you have time on your side (young or have long-term goals), equity oriented investment avenues (shares, mutual funds etc.,) are the best bets to realize your financial goals.
• The interest rates offered by NTPC, PFC & REC Tax free bonds issues were 7.62%, 7.6% & 7.43 respectively. IRFC is offering the coupon rate of 7.50% (20 year bond). This is a clear indication that we can expect reduced interest rates in the future tax free bond issues in this fiscal.
• If you are in 10% or 20% income slab rate, it may be prudent to ignore TFBs. The interest earned on bank FDs and other types of bonds are not exempted from income tax. It is added to your income and is taxed as per the income-tax slabs. As interest earned from tax-free bonds is not taxed, investors in higher tax brackets mostly earn a better post-tax return than from FDs. But remember, the bank FDs score over tax-free bonds in terms of liquidity as these bonds have longer maturity tenure.
• I believe that ‘lack of liquidity’ is the biggest disadvantage of Tax-Free Bonds. The debt mutual funds can generate higher returns when compared to Tax free bonds and you may redeem them anytime. So, the trade off is between higher returns by MFs and the post-tax benefits of tax-free bonds. (You may like reading – ‘Best Debt Funds to invest in India for 2016‘)
• Invest in this issue only if your income tax slab rate is at 30% and you want a steady source of income periodically over a long-term. Also, consider investing only a small portion of your savings towards these bonds.

Do you think one should invest in Tax free bonds? Kindly share your views and comments on IRFC Tax Free Bonds 2015 issue.