Should you invest in NTPC tax free bonds?- Business News
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Should you invest in NTPC tax free bonds?

The effective yield of NTPC tax-free bonds comes to around 11.03 for 20 years

  • September 22, 2015  
  • |  
  • UPDATED   13:05 IST

Markets have been volatile over last few weeks. For investors, making sense of this is tough.  It is therefore advisable to always diversify your portfolio based on goals and investment horizon.

While bank fixed deposits, or FDs, PPF, and post office schemes are some of the safest options, investors can also look at tax -free bonds.  After a gap of one year they are all set to hit the market and it is estimated that around Rs40,000 crore would be raised through tax-free bonds this year.  

NTPC is the first public sector company to launch tax-free bonds this year from September 23 and the issue is open till September 30. If you need to subscribe you need to apply for it quickly given a short window frame for its subscription.  

Here is a low down on what it offers

Issue Size

The company is authorised raise Rs 1,000 crore this financial year. Through the issue the company will raise just Rs 700 crore as it has already raised the remaining amount through private placement. 

Interest Rate

For its 10-year option interest rate is  7.36%, for the 15-year option it is 7.53% and 7.62% for the 20-year option to the retail investors (investing less than or equal to Rs 10 lakh). For the non-retail investors these rates 25 basis points lower at 7.11%, 7.28% and 7.37%. 

Effective yield on NTPC tax-free bonds

NTPC tax free bonds

10 years

15 years

20 years

Coupon Rate for retail investors

7.36

7.53

7.62

Effective yield for 30.9%tax bracket

10.65

10.90

11.03

Effective yield for 20.6%tax bracket

9.27

9.48

9.60

Effective yield for 10.3%tax bracket

8.21

8.39

8.49

Tenure

It is for 10, 15 and 20 years.  But there is no lock-in period as these tax-free bonds are tradable on BSE and NSE. Once it gets listed on the exchange you can sell them off if there is need for money. 

Taxability

As the name suggests the interest earned on these bonds is not taxable. But, remember, these bonds are not eligible for deduction under section 80C of the Income Tax Act. 

Demat Account

You need to have a demat account to invest in these bonds. As the government is moving towards paperless transactions you cannot apply in physical form for these bonds.

Allotment Date

The date is determined by the Board and is notified to the designated stock exchange. Interest on bonds is paid to bondholders from the deemed date of Allotment. 

Minimum Investment

Investors are required to invest minimum Rs 5,000, which is equivalent to at least 5 bonds of face value Rs 1,000 each. 

Credit Rating

The Bonds are rated by  ICRA, CRISIL, and CARE and have been assigned AAA ratings. Moreover, NTPC Limited is a government company, which was conferred 'Navaratna' status by the Government of India in 1997 and upgraded to 'Maharatna' status in 2010.

Categories of Reservation

For category I investors- institutional- 10% of the issue size is reserved. For category II-corporates-25% is reserved.  For Category III - HNI's-  25% is reserved and the remaining 40%  is for retail investors that constitute category IV. 

Refund

Unsuccessful applicants will get their money refunded at 5% p.a.

Issue Timing

Opening Date         September 23, 2015

Closing Date           September 30, 2015

What should you do?

The tax-free interest earned on these bonds makes them attractive, especially for those in higher tax brackets. Consider this: the effective yield on 7.36% 10-year bonds for an individual in the 30.9% tax bracket is 10.65%. Similarly, for 15 years it is 10.90% and for 20 years it is 11.03%. Compared to that the post-tax yield on  8% FD is just 5.52%. 

Moreover, with India's annual consumer price inflation (CPI) for the month of August eased to 3.66% as compared to 3.78% in July it is expected that Reserve Bank of India will cut rates in its next monetary meeting on September 29th.  In the long run experts say interest rates are expected to go down and it is the best time to go for tax-free bonds. 

Suresh Sadagopan, founder, Ladder7 Financial Advisories, says, "From safety and tax efficiency point of view one can look at tax-free bonds. Good thing about tax-free bonds is you can lock in return for 10, 15 and 20 years irrespective of the interest rate moving down. You can expect stable return in the long run." 

Last but not the least though the interest income is tax-free, any gain from sale on an exchange is taxed. Short-term capital gains are taxed at normal income tax rates while long-term capital gains (from sale of bonds after more than one year) are taxed at 10% without indexation