Falling FD rates may help tax-free bonds

Falling FD rates may help tax-free bonds

Top PSU players are gearing up for Rs 40,000 cr issue

Falling bank fixed deposit rates will be a boon for the Rs 40,000 crore tax-free bond issue planned by government-owned enterprises in FY16. Public sector players scheduled to come out with tax-free bonds include the National Highways Authority of India (Rs 24,000 crore), Indian Railway Finance Corporation (Rs 6,000 crore), Housing and Urban Development Corporation (Rs 5,000 crore), Rural Electrification Corporation (Rs 1,000 crore), Indian Renewable Energy Development Agency (Rs 2,000 crore) and Power Finance Corporation (Rs 1,000 crore).

NTPC has just raised Rs 1,000 crore through the first issue of the tax-free bonds announced earlier this year in the Union budget. NTPC tax-free bonds offered a coupon rate of 7.36 per cent for a 10-year tenure, 7.53 per cent for a 15-year tenure and 7.62 per cent for a 20-year tenure to the retail individual investors.

Experts believe the forthcoming new tax-free bond issuances will be able to offer above 7 per cent coupon rate despite a 25 basis point repo rate cut by RBI. Tax-free bonds are tax-efficient compared with the bank fixed deposits, which attract income tax.

Bank fixed deposit rates have fallen sharply over the past year from over 9 per cent to around 8-7.5 per cent for one year. In such a situation those in the highest income tax bracket who pay 30 per cent as tax, will be able to earn much better by investing in forthcoming tax-free bonds compared to the bank fixed deposits.

Said Ajay Manglunia, head-fixed income, Edelweiss Capital, “With a 25 basis point cut in the repo rate, the forthcoming tax-free bonds may offer a coupon rate which would be 5 to 10 basis points lower, but they will be able to offer coupon rates above 7 per cent. Retail investors may not be interested in coupon rates below 7 per cent.’’

In such a situation, smart investors in fixed deposits would like to shift to the tax-free bonds being issued by the highly rated public sector undertaking as most of them enjoy AAA ratings.

This is evident from the huge response to the NTPC tax-free bond issue, which opened on September 23 and had to be pre-closed on September 24 far ahead of its original closing date of September 30. NTPC informed stock exchanges saying that in view of oversubscription, the company is pre-closing the public issue of tax-free bonds on September 24, 2015. 

Source :http://www.mydigitalfc.com/banking/falling-fd-rates-may-help-tax-free-bonds-234