NHAI Tax Free Bonds – Should you invest in them?

Few financial investments create as much excitement as tax-free bonds issued by our PSUs such as REC, NHPC and NHAI.

And why should it not be? The bonds offer some really great benefits to retail investors.

Let’s look at a some of those benefits.

1. They offer fixed interest like Bank Fixed Deposits, that too paid out regularly.
2. The interest offered by these bonds is completely tax-free.
3. They are secured. If for any reason, the company defaults, the assets of the company will be sold and your money will be returned first. They usually carry the highest safety ratings accredited by rating agencies such as India Ratings & Research, ICRA and CRISIL.
4. At the end of the tenure of the bond, the investment amount or principal is returned to you in full.
5. The bonds are for long term, say 10 and 15 years assuring a rate of return for that period. They are also listed on the stock exchange where they can be bought and sold anytime.

What do the NHAI tax free bonds offer?

NHAI too has declared a fresh issue of bonds upto Rs. 10,000 crores. The bonds will be issued for 2 tenures – 10 years and 15 years. They are secured, redeemable, non-convertible in nature of debentures.

The bonds have been rated AAA by 4 agencies, namely, IRRPL, CARE, ICRA and CRISIL. That indicates high safety and stability of the investment.

The minimum application size is 5 bonds at a face value of Rs. 1,000 each, which means that the minimum investment required is Rs. 5,000 and in multiples of Rs. 1,000 thereafter.

The interest rate for the 10 year bond is 7.39% per year, while that for 15 years is 7.6% per year. At the risk of repetition, the interest paid is tax-free.

The interest will be payable on April 1 every year and on the date of redemption in the final year.

Please note that this rate of interest is applicable to Category IV investors as defined by the brochure for NHAI Bonds. Such investors are Resident Individuals and HUFs with application amounts of upto Rs. 10 lacs.  

If you plan to invest more than Rs. 10 lacs as a Resident Individual or HUF, then you will be categorised as a Category III investor and offered a lower rate of 7.14% and 7.35% for 10 and 15 years respectively.

The bonds are proposed to be listed on the BSE and the NSE. However, the price on the exchange can be higher or lower than the face value. This can result in capital gains or loss.

If you happen to sell the bond after 1 year on the exchange, you will have to pay long term capital gains at 10% without indexation.

If you sell it in less than 1 year, than your gains will be taxed for short term capital gains at your regular income tax rate.

Should you invest in NHAI tax free bonds?

An interest rate of 7.39% for 10 years and 7.6% for 15 years, that too tax free, can be a great reason to invest in these bonds.

However, is that reason enough to invest? Are there alternatives?

Some perspectives are in order.

If you were to invest in a Bank Fixed Deposit, you would today get around 8% rate of interest and that too is taxable. If you are in the highest tax bracket of 30%, the net of tax interest you earn is 5.6% only.

In your PPF or EPF accounts, you can earn a 8 to 9% interest rate, tax-free. The rates are announced every year for both PPF and EPF.

If you have a daughter who is less than 10 years of age, you can avail of the Sukanya Samriddhi Yojana in her name, which offers currently a 9.2% interest rate, tax-free. The rate of interest will be announced every year. The amount invested under this scheme is also exempt under Section 80C. The scheme has a 21 year duration.

Which one makes more sense?

As it is understood from the above facts, you are better off investing first in your PPF or EPF accounts before you put your money in NHAI tax free bonds.

In fact, for your daughter less than 10 years of age, the Sukanya Samriddhi Yojana is a far better proposition, purely in terms of rates of interest.

Now let’s talk about 2 more classes of investors, those in the highest tax bracket and those who are retired. 

In my opinion, the NHAI tax free bonds make great investing sense for both of these classes of investors.

For the High Networth Individual or HNI, the bank fixed deposits will never be able to match the returns from these bonds, that too tax free.

For retired individuals too, the NHAI tax free bonds score over the Senior Citizen Savings Scheme and Post Office Monthly Income Scheme. The NHAI bond interest is tax free while that from the other two is taxable.

Not just tax free returns, look at asset allocation too

Having given a recommendation, it would be wise for any investor to know that investment in any instrument has to be in line with the asset allocation and the goal that the money is being put to work for. Tax free returns should NOT be your only consideration to invest. 

If you are already investing enough money in debt oriented investments through your PPF /  EPF / NPS, then there is no need to add to debt with investment through the NHAI bond. It would distort the asset allocation and lower the return that you would earn on your portfolio.

Your asset allocation determines in what investments (stocks, bonds, cash, gold) should your money be invested and how much, so that it can work towards achieving your financial goals.

So, make your assessment and accordingly decide if the NHAI tax free bonds have a space in your portfolio.

---

Information about application to the bonds

FYI, the bonds open for subscription on December 17, 2015 and close on December 31, 2015. You can invest via physical applications available at designated centers or ASBA facility too. You can also use your online trading account to invest in these bonds.

In case of over subscription, the allotment would be given on a first come first served basis.

You can download the detailed prospectus of these bonds from this link.

---

Between you and me: What do you consider while investing in the NHAI tax free bonds? Do share your thoughts in the comments.