IRFCL - Tax Free Bonds
Indian Railway Finance Corporation Limited (IRFCL), the financing arm of Indian Railways and wholly owned by the Government of India, has entered the debt capital market on 21st January 2013, 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 29th January 2013, has a size of Rs.1,000 crore, with an option in company’s hand to retain an oversubscription upto the shelf limit of Rs.8,886 crore. Bonds, rated AAA by CRISIL, CARE and ICRA, indicating highest degree of safety regarding timely servicing of financial obligations, are proposed to be listed on NSE and BSE.
Some features of this issue are:
- 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.
- 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.
- 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.
- 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:-
| Particulars | Series 1 | Series 2 |
| Tenor | 10 Years | 15 Years |
| Frequency of Interest Payment | Annual | Annual |
| Minimum Application Size | Rs.5,000 (5 Bonds) | Rs.5,000 (5 Bonds) |
| In Multilpes of | Rs.1,000 (1 Bond) | Rs.1,000 (1 Bond) |
| Face Value (Rs/Bond) | Rs.1,000 | Rs.1,000 |
| Issue Price (Rs/Bond) | Rs.1,000 | Rs.1,000 |
| Coupon Rate (%) p.a. | ||
| 7.68% p.a. | 7.84% p.a. |
| 7.18% p.a. | 7.34% p.a. |
| Put / call Option | None | None |
*Retail investors can apply for a maximum of Rs. 10 lakh each.
Bonds are to be issued both in physical and dematerialized form, hence a demat account is not necessary to buy these bonds. Trading in the bonds will necessarily be in the demat form.
IRFCL’s 15 year (Series 2) bonds are comparable to 11.35% pre-tax return earned on other fixed income instruments, assuming the highest tax bracket of 30.9% for retail individuals. The company’s earlier bonds of 10 and 15 year tenure, issued in February 2012, are currently trading on NSE with yields of 7.49% pa.
Considering the tax free income to be earned from the bonds, AAA rating and long tenor of the bonds, along with likely falling interest regime scenario ahead, those retail investors looking for fixed asset allocation can subscribe to the series 2 bonds with tenure of 15 years.