NHAI Tax Free Bonds Tranche I – Should You Invest?
The tax-free bonds bonanza continues! After IRFC Tax-free Bonds’ & PFC Tax-free Bonds’ blockbuster issue in Dec & Oct 2015, comes another Govt backed company with its tax free bonds issue. National Highways Authority of India (NHAI) is an autonomous authority of the Govt. of India, responsible for development, maintenance & management of National Highways. It will open its tax-free public issue of bonds of a mammoth Rs. 10,000 crores for subscription. NHAI was among seven state-run entities which was given permission to raise Rs. 40,000 crores in the current fiscal year through tax-free bonds. Read to know if you should invest in NHAI’s tax free bond issue.
Details of NHAI Tax Free Bonds Issue – First Tranche
This tax-free bond issue is being offered for a tenor of 10 & 15 yrs with corresponding coupon rates of 7.39% & 7.60% respectively for retail investors. It’s offering higher coupons than PFC & IRFC issues! Retail Investors are being offered 25 bps higher coupon rate vs. other category of investors. Further details of the issue are mentioned below.
| Tenor (yrs) | Coupon Rate* |
| 10 | 7.39% |
| 15 | 7.60% |
*Coupon Rate mentioned is Annual Rate for Retail Investors
Source – Company
| Issue Size | Rs. 10,000 crores (Rs. 4,000 crores is reserved for retail investors) |
| Issue Open Date | 17th Dec, 2015 |
| Issue Close Date | 31st Dec, 2015 |
| Face Value | Rs. 1,000/- |
| Application Acceptance Time | 10 am to 5 pm |
| Minimum Deposit Amount | Rs. 5,000/- (5 Bonds) & in multiples of Rs. 1,000 thereafter |
| Maximum Deposit Amount | For retail investors, the maximum investment limit is capped at Rs. 10 lacs. |
| Nature of Deposit | Tax-free, Secured, Redeemable & Non-convertible. Also, the allotment will be on a first-come-first-serve basis. |
| Interest Payment | Annual |
| Listing | The bonds will be listed on BSE & NSE and will be available for trading post listing |
| Eligibility | Retail, HNI, QIB, HUF, Corporates |
| Withdrawal | There is no lock-in period. One can sell these bonds in the secondary market after they are listed on the exchanges |
| Credit Rating | AAA (CRISIL, ICRA, CARE & India Ratings) |
| Tax Treatment | Interest earned on these bonds is tax exempt. But if capital gains arises by selling these bonds in the secondary market then capital gains tax will arise – Short-term capital gains tax (<1 yr holding period) levied at marginal tax rate (based on an individual’s tax slab) while Long-term capital gains tax (>1 yr holding period) levied at 10% without indexation benefit. |
Source – Company
* Retail Investors are those who invest uptoRs. 10 lacs.
How to Apply to the Issue?
The bonds will be issued in a dematerialized or physical format. It is also mandatory to have a PAN to be eligible to apply to the issue. For those applying to the issue in the physical form, PAN copy, address proof and cancelled cheque also need to be submitted alongwith the application form.
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ASBA (Application Supported by Blocked Amount) facility can be used to apply
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Online – Through the broker where one has a demat account
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Physical – Applications can be submitted to Members of Syndicate or Trading Members at select locations/ designated branches
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Non-ASBA applicants
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Online – Use online payment gateway of BSE
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Physical – Submit applications to Members of Syndicate or Trading Members
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You may reach out to us in case you are facing difficulties in filling/ submitting the application.
GreenEdge Wealth Services’ View – Should You Invest in NHAI’s Tax Free Bonds?
For an individual falling in 10%, 20% & 30% tax bracket, undoubtedly, the NHAI tax-free bonds offer superior returns with very high safety (AAA rated instruments) as they are issued by a Govt. backed company. As can be seen from beIow exhibit, in terms of risk-reward, these NHAI bonds clearly score over Govt. bonds and Bank Fixed Deposits. Also, in the current interest rate downcycle, it offers an opportunity to lock-in your monies at relatively higher coupon rates.
The tenor of 10 & 15 years is certainly long but there is an opportunity to exit this investment before maturity in the secondary market (the issue will get listed on exchanges) and earn capital gains. If the interest rates in the market declines, then bond price could increase & one could book profits by selling it in the secondary market – This profit will be taxed as per your marginal tax rate if holding period is less than 1 year else it’ll be taxed @ 10% without indexation. However, a word of caution – Liquidity in these bonds could be low if you wish to sell bonds worth greater than Rs. 5,00,000 in a single day.
We advise our readers who fall in 10%, 20% OR 30% tax bracket to shift their savings from Bank Fixed Deposits to these tax-free bonds as they offer superior tax-adjusted returns for very low risk. The below table shows that for a person in 30%, 20% & 10% tax bracket, investing in NHAI tax free bonds is equivalent to investing in Bank Fixed Deposits yielding 10.56%, 9.24% & 8.21% respectively.
Fixed Returns Comparision – Govt. Bonds vs. Bank FD vs. NHAI Tax Free Bonds
| Tenor (yrs) | Govt. Bonds | Bank FDs* | NHAI Tax Free Bonds’ Coupon Rates^ | |||
| Tax-Free Coupon Rate | Pre-tax Coupon Rate @ 30% tax | Pre-tax Coupon Rate @20% tax | Pre-tax Coupon Rate @10% tax | |||
| 10 | 7.56% | 7% to 7.5% | 7.39% | 10.56% | 9.24% | 8.21% |
*Bank FD rates considered from SBI, HDFC Bank & ICICI Bank
^ Coupon Rate mentioned is Annual Coupon Rate for Retail Investors
You may have been disappointed with the NTPC issue (oversubscribed ~6 times), IRFC issue (oversubscribed by ~2.5 times) on the issue open date and closed for subscription at the end of very first day itself. But considering that the issue size is whopping Rs. 10,000 crores, you could just get luckier with this application. The 50 bps repo rate cut by RBI in Sep, 2015 makes the NHAI issue only more attractive against Bank FDs & Govt. bonds. It’s better to lock-in your money at higher interest rates now as the forthcoming tax-free bonds issue could offer lower coupon rates. Also, please note that this issue is on First-come-First-Serve basis; so you should apply on the ‘issue open date’ itself!