IIFCL - Tax Free Bonds

India Infrastructure Finance Company Limited (IIFCL), providing long term financial assiatance to infra projects and wholly owned by the Government of India, has entered the debt capital market on 26^th December 2012,  with an issue of Tax Free Bonds of face value of Rs.1,000 each, in the nature of Secured Redeemable Non Convertible Debentures. Issue, closing on 11^th January 2013, has a size of Rs.1,500 crore, with an option in company’s hand to retain an oversubscription upto the shelf limit of Rs.9,215 crore. Bonds, rated AAA by CARE, ICRA and BWR, indicating highest degree of safety regarding timely servicing of financial obligations, are proposed to be listed on BSE. 

Some features of this issue are:

1. The income by way of interest on these Bonds shall not form part of total income as per provisions under section 10 (15) (iv) (h) of Income Tax Act 1961.
2. There shall be no deduction of tax at source from the interest, which accrues to the bondholders in these bonds irrespective of the amount of the interest or the status of the investors.
3. As per provisions under section 2 (29A) of the Income Tax Act, read with section 2 (42A) of the Act, a listed Bond is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer. Under section 112 of the said Act, capital gains arising on the transfer of listed Bonds shall be taxed @ 10% without indexation.
4. Wealth Tax is not levied on investment in Bond under section 2(ea) of the Wealth Tax Act, 1957.

The current bonds are being offered under two series with features as under:-

*Retail investors can apply for a maximum of Rs. 10 lakh (limit hiked from Rs. 5 lakh earlier).

Bonds are to be issued both in physical and dematerialized form, hence a demat account is not necessary to buy these bonds. Also, the bonds do not have any lock-in period.

Due to the step down feature of these bonds, a retail investor will get a lower interest rate if he purchases the bonds from the secondary market (post-listing) i.e. he will earn interest of 7.19% p.a., 7.36% p.a. and 7.40% p.a. on Series 1, 2 and 3 bonds respectively. Hence, the 50 basis point premium interest will be lost.  

IIFCL’s 20 year (Series 3) bonds are comparable to 11.43% pre-tax return earned on other fixed income instruments, assuming the highest tax bracket of 30.9% for retail individuals. It is the only issue offering tax free bonds with the longest tenure of 20 years. Moreover, the large size of the issue only boosts allotment prospects. 

Considering the tax free income to be earned from the bonds, AAA rating and 20 year tenor of the bonds, along with likely falling interest regime scenario ahead, those looking for fixed asset allocation can subscribe to the series 3 bonds with tenure of 20 years.

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