Which Tax Free Bond to Invest?

As of writing this post, there are 9 companies who have their Tax Free bonds open for subscription. These are listed below in alphabetical order.

  1. Dredging Corporation of India Tax Free Bonds
  2. Ennore Port Tax Free Bonds
  3. HUDCO Tax Free Bonds Tranche II
  4. IIFCL Tax Free Bonds Tranche II
  5. IRFC Tax Free Bonds
  6. JNPT Tax Free Bonds
  7. NHB Tax Free Bonds
  8. PFC Tax Free Bonds Tranche II
  9. REC Tax Free Bonds Tranche II

You can click on any of the above to look at the detailed review of each tax free bonds.

Which Tax Free Bond to Subscribe?

Too much choice makes things difficult for investors. I am often being asked which is the best tax free bond for investment?

The table below summarizes all the above bonds.

The table has been sorted in descending order based on 10 year Coupon rate.

Tax Free Bonds open for Subscription in March 2013

Tax Free Bonds open for Subscription in March 2013

As you can see most companies are offering tenure of 10 and 15 years and HUDCO is paying the highest interest rate for both the tenures (7.53% for 10 Years and 7.69% for 15 Years). So it makes sense to go with HUDCO Tax Free Bonds.

You should not be too much worried about the slightly lower credit rating for HUDCO as it is a Government of India PSU and thus has sovereign guarantee, with almost no probability of default on interest or principal payment.

In case you want to lock your investment for 20 years, IIFCL is the only option available with coupon rate of 7.58%.

If you want to invest more than Rs 10 Lakh it would make sense to diversify among companies as investment of more than Rs 10 Lakh would keep you out of Retail Investor Category and the interest offered would decrease by 0.5%. This is applicable to all the above bonds.

Tax Free Bonds – Who should invest?

Tax Free Bonds are not meant for everyone and is mostly suited for people in higher tax bracket of 20% of more. As of today, banks are offering around 9% for long term fixed deposit to general public while 9.5% for senior citizens. This translates into 7.39% for General public and 7.82% for Senior Citizens in case of 20% Tax bracket; and 6.43% for General public and 6.80% for Senior Citizens for 30% Tax bracket.

Thus, Fixed Deposit (FD) is a better investment for people whose income is below taxable limit or in lower tax bracket of 10%. Also, FD turns out to be better investment for Senior citizens with 20% tax bracket due to higher interest offered by banks to them.

Also Read: How are you losing Money by investing in Fixed Deposits?

You should also exhaust your PPF limit of Rs 1 Lakh before investing in Tax Free bonds as PPF offers 8.8%, which is tax free.

Tax free bonds are not good investment for NRIs as they can invest into NRE fixed deposit schemes of banks, where the interest offered is equivalent to FDs but the interest income is not taxed.

Also Read: Tax Treatment of Your Investments!

Points to Ponder:

The response to these tax free bonds has not been great, as they are offering lower coupon rates than their last launch. This was expected as RBI had decreased policy rates in January 2013. Going forward RBI would further decrease policy rates, thereby lowering interest rates in general. So in case you want to invest in these bonds, its good time to invest. Don’t be misguided by comparing the interest rates offered in past launch. Going forward the coupon rates of these ax free bonds is going to decrease at least for next 1 – 2 years.

Budget 2013 announced the launch of Inflation Indexed Bonds in the next financial year 2013-14. The structure is still not finalized but they might turn out to be competing investment to tax free bonds. So keep your eyes open for them.

The interest for tax free bonds would be credited to your bank account once every year. You should have a plan about how you are going to reinvest that amount.

Investment in tax free bonds in your non-working spouse’s name gives an opportunity to save tax. You can look the details here.

2 thoughts on “Which Tax Free Bond to Invest?

  1. Charu Sarkar says:

    As per your suggestion I have applied for HUDCO 10 Year bond subscription. Thanks for the comparison it was useful.

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