IRFC 7.64% Tax Free Bond – March 2016 – Should You Invest?

IRFC Tax Free Bond - Tranche II - March 2016

IRFC Tax Free Bond – Tranche II – March 2016

IRFC (Indian Railway Finance Corporation), a Government of India company is issuing Tranche II of Tax Free Bond. It would offer coupon rate up to 7.64% for retail investors depending on tenure. You can choose between tenure of 10 and 15 Years. The bond issue would be open for subscription for March 10 to 14, 2016.

About IRFC:

IRFC, fully owned by the Government, finances the acquisition of rolling stock such as locomotives, coaches and wagons ordered by the Ministry of Railways (MoR). The MoR and its related entities are IRFC’s sole clients. It had zero non performing assets as of March 2015. The company posted a profit of Rs 758 crore during FY15.

Salient Features: IRFC Tax Free Bonds 2016

  • Offer Period: March 10 to 14, 2016 (the offer can be pre-closed on full subscription)
  • Annual Interest Rates for Retail Investors: 7.29% for 10 Years, 7.64% for 15 Years
  • The interest rates are 0.25% less for HNIs, QIBs and corporate subscribers.
  • NRIs can invest in these bonds
  • 60% of issue is reserved for Retail Investors
  • Price of each bond: Rs 1,000
  • Minimum Investment: 5 Bonds (Rs 5,000)
  • Max Investment Limit for Retail Investor: Rs 10 Lakhs
  • Date of first Interest Payment: First Interest Payment date is on October 15, 2016 and subsequently on October 15 of every year.
  • Can be applied both in Physical and Demat Form
  • Allotment: First Come First Serve
  • Listing: Bonds would be listed on BSE & NSE and will entail capital gains tax on exit through secondary market
  • Tax/TDS: As these are tax Free Bonds so no tax is to be paid and there is no TDS on interest

Also Read: PPF – A Must Have Investment

IRFC Tax Free Bond – Interest Rate:

The IRFC Tax Free Bond offers the following interest rates. The interest would be paid every year.

The table also shows the effective interest rate for different tax slabs. For e.g. To earn post tax 7.64% interest on deposit a person in 30% tax bracket should actually get pre tax return of 11.06%.

IRFC Tax Free Bond - March 2016 – Interest Rate

IRFC Tax Free Bond – March 2016 – Interest Rate

Who should invest?

Tax Free Bonds are suited for people in the tax bracket of 20% or higher who are looking for regular and safe income. In case you do not want regular income you should first exhaust your Rs 1.5 lakhs PPF limit where the returns are 8.7% and tax free. Salaried employees should opt for VPF before looking at tax free bonds. Both the above options have higher returns, tax free and partial exit options after 5/6 years.

Also Read: What is the Maximum Income Tax You can Save for FY 2015-16?

Why you should invest?

  1. Almost “NO” credit risk. The bonds are rated “AAA” and the company is owned by Government of India. The bonds are secured to the full extent and have the highest credit rating (AAA).
  2. For retail investors, the interest offered is higher than the offers on Tax free bonds in Secondary Market.
  3. Good for investors in the tax bracket of 20% or higher looking for safe and regular income for long duration.
  4. IRFC tax free bonds is the last tax free bond offer for the financial year. Budget 2016 has made no provision for tax free bonds in next financial year. This might generate premium for these bonds going forward.
  5. There are chances of further rate cut by RBI. If it happens there would be capital appreciation in the bond price.

Why you should not invest?

  1. PPF and EPF/VPF offer tax free interest rate of more than 8.7%. So you should first exhaust those options especially if you are not looking for regular income.
  2. If you are in 10% tax bucket or pay no taxes, you would be better off with banks Fixed deposits or debt mutual funds.

Also Read: Highest Interest Rate on Bank Fixed Deposits [comparing 44 banks]

How to Apply?

The bonds can be issued both in physical and demat form.

You can apply online through ASBA or download the Physical Form from the Edelweiss Financial Services and follow the instructions.

To Conclude:

IRFC Tax Free Bonds 2016 suits investors who are looking for safe, regular income and are in the higher tax bracket. This is last tax free bond offering for this financial year. There might not be any Tax free bonds issue next financial year.

Previous Tax Free Bond were over-subscribed before the formal closing date, so if you want to subscribe these bonds, invest early as these would be grabbed very soon and may close for subscription if it gets fully subscribed before closure date.

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