IRFC is hoping to attract retail investors with its forthcoming tax-free bond issue
Even as all eyes are turned on the booming stock markets, the last few months have seen a spate of bond offerings for risk-averse investors. Players like IDFC and L&T Infrastructure Finance have issued long-term infrastructure bonds to take advantage of Section 80CCF, which allows tax deduction on investments of up to Rs 20,000. Coming up next week is another kind of bond issue — tax-free bonds from Indian Railway Finance Corporation (IRFC).
The IRFC issue is aimed at big investors since the minimum investment — and the face value of each bond — is Rs 1 lakh. Indeed, the private placement issue is essentially targeted at corporations but IRFC is hoping to draw retail investors too.
IRFC will issue tax-free, secured, redeemable non-convertible Railway Bonds of five, seven and 10-year tenures. The interest rate is expected to be 6.05 per cent on the five-year bonds, 6.32 per cent for seven years, and 6.72 per cent for 10 years. The interest, completely tax-free, will be paid out twice a year. So, on the five-year bond, the equivalent taxable rate would be around 9 per cent.
The IRFC bonds are attractive for high net worth investors who’re looking to diversify and want a fixed rate of return with a regular income flow. “For retail investors, these bonds are as good as investing in government securities because they’re absolutely risk-free. And the return is a lot higher than the return on government securities. The tax-adjusted return is quite attractive too.
How do these bonds compare with other options? If you’re looking for a sovereign guarantee, the five-year RBI Relief Bonds carry an interest rate of 8 per cent. But the interest income is taxable. Banks like State Bank of India are offering five-year fixed deposits at 7.5 per cent, though the interest income is taxable and tax is deducted at source.
However ,the big ticket size of the IRFC bonds means that their retail reach will be limited.These are not classified for 80CCF exemption so for retail investors, it doesn’t make sense. Also, tradability may be an issue because if you want to sell just two-three bonds, you may not get a buyer easily.
In comparison, take a long-term infrastructure bond issue like the one from L&T Finance, which offers 7.5 per cent interest on its 10-year bonds with a buyback option after five years. The big kicker here is the Rs 6,000 tax saving (for the highest tax slab) on an investment of Rs 20,000.
If you’re a conservative investor who wants only risk-free products, infrastructure bonds are a brilliant idea. For big investors, the IRFC bond may give better returns as tax deduction is limited to investments of Rs 20,000.
More infrastructure bond issues are expected before the close of the financial year. Non-convertible debenture issues are in the offing too.
