Tax free bonds are those bonds issued for long term, for investment horizon of 10 to 20 years, in which interest earned is exempt from tax. Tax free bonds do not provide any benefit of tax savings but only interest earned on these bonds is tax exempt.
It’s not only the higher post-tax returns that are attracting investors to these tax free bonds. These tax free bonds are issued by the government-backed companies that guarantees safety of capital.
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Basic Central Board of Direct Taxes (CBDT) vide Notification dated 6th July 2015 authorises the entiites mentioned in table below, to issue, during financial year 2015-16, Tax Free, secured, redeemable, non-convertible bonds, aggregating to Rs. 40,000 crore.
Eligibility: The following shall be eligible to subscribe to the bonds:-
(a) Retail Individual Investors (RIIs); (Limit upto 10 lakhs)
(b) Qualified Institutional Buyers (QIBs);
(c) Corporates : including statutory corporations, trusts, partnership firms, limited liability partnerships, cooperative banks, regional rural banks and other legal entities, subject to compliance with their respective applicable legislations; and
(d) High Net worth Individuals (HNIs). (Above 10 lakhs)
Rate of interest:
1. There shall be a ceiling on the coupon rates based on the reference Government security (G-sec) rate.
2. The reference G-sec rate shall be the average of the base yield of G-sec for equivalent maturity reported by Fixed Income Money Market and Derivative Association of India (FIMMDA) on a daily basis (working day) prevailing for two weeks ending on Friday immediately preceding the filing of the final prospectus with the Exchange or Registrar of Companies (ROC) in case of public issue and the issue opening date in case of private placement.
3. The ceiling coupon rate for AAA rated issuers shall be the reference G-sec rate less 55 basis points in case of RIIs and reference G-sec rate less 80 basis points in case of other investor segments referred to at (b),(c) and (d) of paragraph 1 above.
4. In case the rating of the issuer entity is AA+, the ceiling rate shall be 10 basis points above the ceiling rate for AAA rated entities as given in clause(3) .
5. In case the rating of the issuer entity is AA or AA-, the ceiling rate shall be 20 basis points above the ceiling rate for AAA rated entities as given in clause(3).
6. These ceiling rates shall apply for annual payment of interest and in case the schedule of interest payment is altered to semi-annual, the interest rates shall be reduced by 15 basis points.
7. The higher rate of interest, applicable to RIIs, shall not be available in case the bonds are transferred by RIIs to non retail investors.
Public issue:
1. At least 70 per cent of the aggregate amount of bonds issued by each entity shall be raised through public issue and the same shall not be applicable in case of entities where the aggregate amount of bonds as per column (3) of the table is less than rupees five hundred crore.
2. 40 per cent of such public issue shall be earmarked for RIIs.
Total Issue -Following entities have received approval with the below stated limits for raising out funds through tax free bonds for the financial Year 15-16:BALANCE ISSUE FOR SUBSCRIPTION
Taxation
- No Tax on Interest Income
- No TDS Deduction on interest as interest is tax free
- Interest earned has to be shown as exempt income while filing Income Tax Return ITR
- If sold within 1 year has to pay short term capital gain at the Normal tax rate
- Long Term Capital Gain (sale after completion of 1 year) Tax at 10% without indexation and 20% without indexation
- You can avoid Long term capital gains by investing under section 54EC. (REC or NHAI Capital Gain Bonds)
IRFC Tax Free Bond
Tax Free Bonds Interest Payment Table
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REC TAX FREE BOND
Tax Free Bonds Interest Payment Table
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PFC TAX FREE BOND
Tax Free Bonds Interest Payment Table
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NTPC TAX FREE BOND
Tax Free Bonds Interest Payment Table
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Benefit
Tax Free Bond appeal to investor who are looking for fixed and safe returns keeping the risk level as the same as that of a Bank FD. Tax Free Interest Tax Free Bond scores over a Bank FD since the interest is Tax Free in the hand of investor (TDS not deducted on interest). It is not included in the your total income while filling income tax returns.
Safety : Tax Free Bond are issued by PSUs and come with the high credit rating.
Tradable Listing on stock exchanges, freely tradable on stock exchange.
Retail Preference TFB given higher coupon to retail investor.
Format : Option of holding bonds in ” Demat Form ” as well as ” Physical Form” – easy to handle and monitor.