NHAI Tax Free Bonds 2015-2016 : Issue Details & Review

For the last few months, state-run companies like NTPC (National Thermal Power Corp), PFC (Power Finance Corporation), REC (Rural Electrification Corp), IRFC (Indian Railways Finance Corp) and IREDA have come up with Tax Free Bond issues. All these issues have been oversubscribed. NHAI Tax Free Bonds is the latest pulic issue which is going to be open for subscription from 24th February 2016 to 1st March, 2016.

Several state-run companies raised Rs 30,000 crore through tax-free bonds in FY12, Rs 25,000 crore in FY13 and Rs 50,000 crore in FY14. These funds are utilized to fund infrastructure projects.

Below are the details of the firms and the maximum allocated amount of funds they can raise by offering new Tax Free Bonds in the current Financial Year (2016);

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.

NHAI Company Profile

• National Highways Authority of India (NHAI) is an autonomous authority of the Government of India (GoI) under the Ministry of Road Transport & Highways (MoRTH) constituted on June 15, 1989.
• NHAI is responsible for the development, maintenance and management of the National Highway (NH) given to it by the GoI and for matters connected or incidental thereto.
• As on July 31, 2015, NHAI has awarded 196 BOT (Build-Operate-Transfer) Toll based contracts at a total project cost of Rs. 1,69,828.62 crores and 51 BOT Annuity based contracts at total project cost of Rs. 30286.66 crores through PPP mode (Public-Private Partnership).

NHAI Tax Free Bonds 2016 – Latest Issue Details 

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

• Bonds Issue opens on : 24th Feb, 2016.
• Issue closes on : 1st March, 2016.
• Issue size including over-subscription: Rs 3,300 crore (max).
• 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).
• NHAI 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,“CARE AAA” by CARE, “IND AAA” by IRRPL and “[ICRA] AAA” by ICRA. (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.
• Can NRIs apply for NHAI Tax free bonds? – Persons Resident Outside India, Foreign nationals (including Non-resident Indians, Foreign Institutional Investors and Qualified Foreign Investors) and other foreign entities are not eligible to invest in this issue. (NRIs were allowed to invest in PFC, REC & IRFC issues)
• These instruments are classified as Tax free, secured, redeemable and non-convertible bonds in the nature of debentures.
• NHAI Tax-Free Bonds will be issued either in Physical or Demat mode.
• NSDL and CDSL are the depositories to the Issue.

Interest Rates offered on NHAI 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 ; (20 year bonds are not being offered)

• On 10 year duration bonds the Coupon rate is 7.29%. (NHAI’s last Dec issue has offered a coupon rate of 7.39%)
• On 15 year duration bonds the Coupon rate offered is 7.69%. (NHAI’s previous Dec issue offered a coupon rate of 7.60%)

(Investors who apply for bonds worth above Rs 10 Lakh would get 7.04% on a 10 year bond and 7.39%interest rate on 15 year bond)

NHAI Tax Free Bonds 2015 – Issue Details (Previous Issue Details)

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

• Bonds Issue opens on : 17th Dec, 2015.
• Issue closes on : 31st Dec, 2015.
• Issue size including over-subscription: Rs 10,000 crore (max). The size of the issue is large when compared to IRFC’s last issue of Rs 4,532 crore.
• Basis of Allotment : For Retail Individual Investor – 40% of the Issue Size (Rs 4,000 cr)
• 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).
• NHAI 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,“CARE AAA” by CARE, “IND AAA” by IRRPL and “[ICRA] AAA” by ICRA. (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.
• Can NRIs apply for NHAI Tax free bonds? – Persons Resident Outside India, Foreign nationals (including Non-resident Indians, Foreign Institutional Investors and Qualified Foreign Investors) and other foreign entities are not eligible to invest in this issue. (NRIs were allowed to invest in PFC, REC & IRFC issues)
• Frequency of interest payment is Annual. April 1, every year except the last interest payment along with the redemption amount
• These instruments are classified as Tax free, secured, redeemable and non-convertible bonds in the nature of debentures.
• NHAI Tax-Free Bonds will be issued either in Physical or Demat mode.
• NSDL and CDSL are the depositories to the Issue.

Interest Rates offered on NHAI 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 ; (20 year bonds are not being offered)

• On 10 year duration bonds the Coupon rate is 7.39%. (IRFC’s latest Dec issue is offering coupon rate of 7.32%)
• On 15 year duration bonds the Coupon rate offered is 7.60%. (IRFC’s latest Dec issue is offering coupon rate of 7.53%)

(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.)

Tax Saving Vs Tax-Free

So, how is tax-saving different from tax-free?

Though the two terms are used in relation to taxation matters, there exists a considerable difference between the two. Tax-saving implies that there are certain provisions in the Indian Income Tax Act that allows an individual to save tax by investment in some particular investment instruments (like ELSS mutual funds or Life insurance premium etc., under Section 80c) or when the taxpayer has incurred some expenses on which tax liability can be minimized to some extent (Example – HRA, LTA etc.,).

Tax-free on the other hand implies income that is not taxable in the hands of investors i.e. the income from such tax-free source is not included in the total income for the purpose of computation of total tax liability. With no income tax being charged on the returns on the tax-free investment no other rebate in the form of tax deduction for the amount invested is provided. So, Tax free bonds are not eligible for deduction under section 80c.

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 NHAI Tax Free Bonds Feb – Mar 2016 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.
• 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? Have you invested in any of the previous TFB issues?

Kindly share your views and comments on NHAI Tax Free Bonds February-March 2016 issue.