Tax free bonds are back; be an early bird to gain advantage

MUMBAI: Public issues of tax-free bonds are back. The first one being NTPC's Rs 700-crore issue which will open for subscription on September 23. Of the total issue size, 40% is reserved for retail investors who invest up to Rs 10 lakh, with the balance being offered to HNIs, QIBs and corporates.

Retail investors will get 7.36% for a 10-year bond, 7.53% for a 15-year bond and 7.62% for a 20-year bond. The coupon offered to retail investors is 25 basis points higher than what is offered to other categories of investors. The NTPC bond issue will be followed by the likes of REC, IREDA, NHAI, IRFC and HUDCO.

Wealth managers believe these bonds work well for investors who are in the high-tax bracket.For example, an SBI fixed deposit pays a maximum of 7.75%. So, if you are in the highest tax bracket (30.9%), your effective tax yield is 5.35%. Compared to this, a tax-free bond gives you 7.62%.

"As inflation is running low, interest rates are expected to fall in the near future. Hence, investors with money would do well to invest as early as possible and not wait for subsequent issuances," says Ajay Manglunia, head-fixed income, Edelweiss Capital.