A few people have commented about receiving an SMS for the Demat allotment of NHAI tax free bonds, and if you applied for these bonds, and haven’t got any notification yet, you should check your Demat account in the next few days and they will most probably show up there.

In the past I’ve seen people not getting to know about these kind of allotments till a long time because their phone number is wrong or something like that and unfortunately none of these companies seem to think it is important to tell people when they are going to allot the bonds or when they are going to list so people have to just keep an eye out for news sources and depend on others to see when others get it and then check their accounts.

The NHAI bonds haven’t started trading yet of course since they were just allotted yesterday and Shiv found out that PFC bonds were listed in the wholesale segment which is a bit unusual. So watch out on Monday to see how they list and where the trading occurs.

Thanks to Amlan Basak, Shiv, Ravi and Bhaskar for sharing this information in comments here. Bhaskar and Shiv also mentioned that they got full allotment – I am not sure if this is applicable to everyone in the retail category but that might well be the case.

If not too much trouble can others who applied for the NHAI issue also leave comments to let everyone else know if you got the allotment or not and what percentage did you get. This not only helps keep track of what happened in this issue but helps make guesstimates for future issues as well.

Late last year RBI deregulated the interest rates on savings accounts and allowed banks to set their own rates. This resulted in banks raising their interest rates and creating two slabs of under a lakh and over a lakh.

For example, Yes Bank offers 6% on the saving bank balance of under Rs. 1 lakh and 7% on balances of over a lakh. Similarly, Kotak pays 5.5% for balances of less than a lakh and 6% on balances of over a lakh.

There were a few comments at the time asking about how interest will be calculated and if banks will take the lowest bank balance in a month to calculate that or something else like that.

I was reminded of this discussion when I came across a RBI notification that issues some clarifications on the way interest is calculated.

From reading the second point in there it’s quite clear that the banks will pay you the interest on the basis of your daily balance. So, they will see what your balance was at the end of the day and pay you interest based on that.

The second aspect of that is slightly unclear to me. I read it to understand that if you have a balance of Rs. 1,25,000 in your savings bank account at Yes Bank – they will pay you 6% for Rs. 1,00,000 and 7% for the Rs. 25,000 after that. They are not going to pay  you 7% for the whole amount, which is what I originally thought.

Does anyone have practical experience with this or knows for certain how this is going to be calculated? Please leave a comment or email me if you do as this is going to be of interest to a lot of people.

Like Indian Railways, HUDCO is also going to come up with tax free bonds starting on the 27th January and they offer a slightly higher rate, just a little bit higher than the Indian Railways tax free bonds.

While Indian Railways offered 8.15% for the 10 year series  and 8.30% for 15 years, HUDCO is going to offer 8.22% for the 10 year series and 8.35% for the 15 year series.

There is a difference in rating as well and HUDCO is rated Fitch AA+ by Fitch and CARE AA+ by CARE which is a notch lower than the Indian Railway issue.

The minimum investment needed is Rs. 10,000 and you can invest in multiples of Rs. 1,000 after that.  The bonds will list on both NSE and BSE and the bond issue size is Rs. 4,684.72 crores.

This issue also has what’s being called the step down feature which means that the higher interest rate that the retail investors get is only applicable as long as they hold the bonds. If they sell the bonds on the stock exchange then the person who buys it from them will not get the higher rate but will instead get the rate decided for the other categories.

Now, let’s take a look at some questions that came up on yesterday’s post and are relevant here as well.

Can NRIs invest in the HUDCO tax free bonds? 

Yes, NRIs can also apply to this offer and can either buy it in the retail category or the other category.

Are these tax free bond issues better than fixed deposits?

I have done fairly detailed (perhaps a bit too detailed) calculations to compare the returns between a SBI fixed deposit and a tax free bond and that shows that bond returns are better than the fixed deposits. You can look at the post to see the detailed numbers.

Who falls under the retail category?

Individuals and NRIs who are going to invest less than Rs. 5 lakhs will fall under the retail category.

How will the shares be allotted – first come first serve or proportional allotment to everyone?

I couldn’t locate this information but MoneyVriksh left a comment yesterday stating that it will be first come first serve. I think it makes sense to apply early since there is a chance of over-subscription.

What is tax free: Is the principal tax free or the interest tax free?

This is not like the 80CCF infrastructure bonds that are open right now so don’t confuse these bonds with them. This is truly tax free in the sense that the interest you receive from these bonds will not be taxed.

The infrastructure bonds are called tax saving bonds but are not tax free. They save tax because when you invest in them then you can reduce the amount of investment (up to a maximum of Rs. 20,000) from your income and lower your tax incidence. But the interest income on them is taxable, so they are not tax free.

As far as the principal being tax free is concerned – the principal is always tax free. That’s your money anyway and tax is charged only on the income by the way of interest or capital gains.

This is all I can think of to write about the HUDCO tax free bonds but if you have any more questions then please leave a comment.

Indian Railways announced the details of their tax free bond issue, and Shiv emailed me the term sheet today.

There is one new and interesting thing about this offer which I’ll come to in a while but before that let’s take a look at the other regular details of these bonds.

There will be two series – one with a 10 year maturity, and the second one with the 15 year maturity, and the interest on both options will be paid annually.

The issue is going to open on January 27th 2012 and is planned to close on the February 10 2012. You have to invest a minimum of Rs. 10,000 and since one bond has a face value of Rs. 1,000, you can invest in Rs. 5,000 multiples after that.

The issue size is Rs. 6,300 crores and the issue has been rated CRISIL AAA and CARE AAA by CRISIL and CARE respectively; this of course is their highest rating. ICRA has rated it AAA as well.

30% of the issue is reserved for the retail investors and this is important because retail investors will get a higher interest rate than other class of investors. An individual investing less than Rs. 5 lakhs will fall under the retail category.

The bonds will also list on the NSE and BSE.

Here are the details of the issue in a snapshot.

As you can see the interest rate that retail investors get is a tad higher than the other categories and they have put in a condition to say that only the first allottee will get the higher rate. So, if you want the higher interest you must subscribe to the issue. If you buy it from the stock exchange then you will not get the retail investor interest rate even if you are a retail investor. You will get the lower interest rate.

This is a clever way of first of all giving an incentive to retail investors to subscribe to the issue and then reduce the overall interest burden because some people will end up selling the bonds in the market and then Indian Rail will not have to pay the higher interest rate for them.

I think this should speed up the subscription of the retail part which was lagging so far in the other issues, and I think this will catch the interest of NRIs as well who can invest in these bonds under either category.

The tax free offers that are coming out right now are fairly good deals and if you are looking for fixed income products then you can consider this issue.

Update: Corrected the face value from Rs. 5,000 to Rs. 1,000 and added ICRA’s credit rating per Shiv’s comment below. 

There has been a lively debate about how to compare the yield between tax free bonds like NHAI and something like a ten year SBI fixed deposit in the comment section of the NHAI tax free bond. This debate was started by a calculation from Amlan Basak, and then others have weighed in on his calculations.

Savio had made a similar comment a few days ago, and basically what they are saying is that since bank fixed deposits are compounded 4 times a year, whereas the bond interest is compounded only once a year – the returns from a SBI bank fixed deposit is going to be higher than a PFC or NHAI bond issue in the long run.

Let me reproduce Amlan Basak’s comment here because he is the one that has done the calculation.

Currently SBI is giving 9.25% for 10 years FD.
let’s assume you invest 1,00,000.
With quarterly compounding interest the maturity amount will be 2,49,544 (though it is surprising but it is the power of compounding).
Interest component = 1,49,544
Tax @30.9% = 46,209
So, effective maturity value = 1,00,000+1,49,544-46,209=2,03,335

for NHAI, simple interest of 8.2% will yield 82,000 in 10 years
So, final amount = 1,82,000
It is less by 21,335

Please let me know if I made any mistake in the calculation.

(Note: I am not considering how we are going to invest the 8200 per year that we will get as interest)

There are a few things that I want to highlight in this calculation.

First point and he has himself acknowledged that is the fact that he has not included the NHAI interest amount reinvestment in his calculation. So, on one hand you have the SBI money that is put to work by you at the high rate of interest but on the other hand you have the interest amount from NHAI or PFC that is not reinvested but is supposed to do nothing at all.

If you had  assumed that the NHAI interest is also reinvested at the 8.2% that is the original bond’s coupon rate then you actually get Rs. 2,19,923 which is about Rs. 16,000 higher than the SBI fixed deposit amount. This is probably theoretically, a more correct way of comparing these two.

Reinvestment makes a big difference and another way to highlight that is to look at what would happen if you reinvested NHAI interest but simply took the SBI FD interest home with you every year.

But coming back to the original calculation I can understand why Amlan Basak didn’t consider investing the Rs. 8,200 back from the bonds, and this is what Kiran tweeted out to me some time ago as well – that for most people they will not reinvest the money and it will just lie in their bank accounts. Hence for majority of investors the cumulative option on bonds is better than the annual interest one.

The thing to consider in this is that you don’t see anything from your SBI investment for 10 long years, but you are getting Rs. 8,200 paid out to you from NHAI every year. With the high inflation that we have today – you just can’t compare the absolute sums from the two investments. Rs. 2,03,335 is worth a lot less in ten years than it is today. So, to really evaluate these two cash streams you should see the present value of these two cash flows. That means you see what the maturity amount ten years from now is worth in today’s rupees and then compare that with the cash flows on the bond. In this case, the present value of cash flow from bonds is higher than the present value of the fixed deposit. I have assumed inflation to be at 7%.

I have done all these calculations on a Google Spreadsheet that you can access here. It is read only so you can copy it to your own spreadsheet and make changes.

Another aspect of these numbers is that you are supposed to pay tax on the interest income every year so that will reduce what you get at the end of year. This has been pointed out by Vaibhav.

The take away for me has been that these bonds don’t offer as sweet a deal as I earlier thought them to offer and thanks to Amlan Basak and Savio for that. However, if I had an option I would definitely opt for the bonds instead of the SBI fixed deposit.

Since this has been a complicated exercise I won’t be surprised if I made mistakes, so I’d request you to review the numbers and point out if I made any errors. And like always, comments are welcome!

Shiv has just left a comment with a link to download the application form of the NHAI tax free bonds. He had created such a link to download the application form of IDFC and L&T infrastructure bonds as well, and we had to create new links because there were more than 500 downloads which was the limit set on the overall downloads!

I was a bit surprised by that because I didn’t realize that so many people are just looking for a place to download forms. I guess just a post to provide a download link serves as much (if not more) purpose than the original post reviewing the bond!

The application form is just over 1 MB, and here’s the link:

Download NHAI Tax Free Bond Application Form

Here is Shiv’s comment about the form:

Hi Manshu.. Like IDFC Infra Bond and L&T Infra Bond issues, please check another Web Link to download the NHAI Tax-Free Bond Application Forms online:

http://www.sbicapsecu.co.in/pdfstamping/NHAI_KUKREJA.aspx

Note: Just want to tell the investors that the photocopies of a form cannot be used to invest, as each form has a unique application no. To get multiple forms in order to invest in different names, just click multiple times.

In case any reader has any query regarding this link (E-Form), NHAI Tax-Free Bonds as such or wants to invest in NHAI Tax-Free Bonds, Call/SMS 9811797407 (Gurgaon, Delhi or Noida) or mail us at ojascap@gmail.com

Hemant has written a post specifically focusing on the NRI aspects of the NHAI bonds, which will be a useful read for NRIs interested in either this issue, or generally in tax free bonds.

National Highway Authority of India (NHAI) is usually known for issuing Section 54EC bonds, but for the first time they are issuing tax free bonds as well.

Now, a lot of people confuse tax savings or no TDS with tax free, but these are truly tax free bonds, which means that the interest from these bonds is tax exempt – you don’t have to pay any tax on the interest regardless of your income tax bracket.

The bonds will list on the BSE and NSE, and if you sell them on the exchange and make capital gains on them, then that will be taxable. Listing of the bonds doesn’t however mean that the bonds will be issued in dematerialized form only and you will compulsorily need a demat account.

NHAI bonds will be issued in both physical and demat form, so people who don’t have demat accounts can also buy these bonds. There are two series of bonds – one with a ten year maturity, and the other with a 15 year maturity. The first series has an interest rate of 8.20% and the second series has an interest rate of 8.30%, both the series will pay interest annually.

Since some of the best bank interest rates are at 10% right now – you can see that for people in the 30% or 20% tax bracket – this issue has got great yield.

NHAI Tax Free Bonds

NHAI tax free bonds have been rated CRISIL AAA/Stable, CARE AAA, and Fitch AAA by CRISIL, CARE and Fitch respectively. These are very high ratings, and although NHAI has made losses in the last three years – it’s easy to see how these credit agencies assigned these bonds the highest rating.

This is a secured issue from a company that comes under the Government of India, and as such it’s hard to see how NHAI could default on its debt obligation.

I think this is a good issue especially for people in the 30% tax bracket, and won’t be surprised if it gets over subscribed in the first few days itself. This is especially so because interest rates can’t remain this high forever and this issue allows you to lock on to these high rates for 10 or 15 years, which is quite a good return for a safe debt instrument. And even NRIs can invest in these bonds, so to the extent they can manage the application process, this will be an attractive offer for them as well.

SBI Capital  Markets, AK Capital Services, MCS Limited, ICICI Securities and Kotak Mahindra Capital are the lead managers to the issue so you should find the application forms in their offices. Other investment firms like Karvy should also have the application forms, and I think some of these companies will also enable it so that you can apply for the NHAI tax free bonds online, but I don’t have a definite list yet.

I’m sure as more information comes in – you will leave comments and I’ll update the post with where exactly you can find the application forms etc. at the time.

Meanwhile, many thanks to Rakesh Jain who let me know about this issue much in advance, and let’s hear any other questions or observations you have about the NHAI issue in the comments.

Download NHAI Tax Free Bond Application Form

Update: Deleted the part about allotment being on a first come first serve basis per Shiv’s comment below.

Rural Electrification Corporation (REC) which is a Navratna and has high debt ratings has come with the latest issue of 80CCF infrastructure bonds.

This issue opened on 19^th December 2011 and will close on February 10 2012, and has interest rates which are only just slightly lower than the other two issues – IDFC and IFCI that came out recently, though they are higher than the PFC issue.

Here are the four options that you can choose from the REC issue.

There are going to be questions on which is the best infra bond among the ones that are open right now, and I think all of them are very close, and it’s just not possible for me to say definitively that one is better than the other.

The other question is between annual and compounded options, and if there is a tax benefit of opting for the compounded one because capital gains taxes are lower than tax on tax on interest payment, and the answer to that is it’s not tax efficient because even in the latter option they charge tax on interest and don’t use the capital gains calculation.

Now, you could say that I’d much rather have Rs. 30,308 after 5 years (if you invested 20K in the 5 year buyback option) instead of earning an interest of just Rs. 1,790 in a year and that’s your option but as far as tax is concerned – one is not more efficient than the other.

I don’t know if there are any other infrastructure bonds lined up but there are already quite a few open and  you should pick one soon so that you get the necessary documents for tax purposes in time.

Muthoot Finance has raised quite a stir by coming up with a non convertible debenture (NCD) offer that’s offering upwards of 13% to investors.  This issue is quite different from the last Muthoot Finance NCD issue where the minimum investment amount was Rs. 1 lakh and there was just one option with a 2 year maturity.

In this issue, the minimum investment is Rs. 5,000 and they have four investment options.

The offer opens on December 22, 2011 and will close on January 7 2012. The lead managers are ICICI Securities Limited, AK Capital Services Limited, HDFC Bank Limited, and Karvy Investor Services Limited.

The NCD issue has been rated ’CRISIL AA-/Stable’ by CRISIL and ’[ICRA] AA- (stable)’ by ICRA, which is a good credit rating from both of these issuers.

Here are details on the four options that the Muthoot NCD has on offer.

Muthoot Finance Secured NCD

The minimum investment is Rs. 5,000 which means you will have to buy 5 of these bonds at the minimum and they will list on the BSE after the issue closes.

Muthoot Finance’s latest quarterly report shows that the company has made consistent profits, and this is a secured NCD issue which means that certain assets of the company will be attached to the NCD in case of default. However, this doesn’t mean a guarantee of any kind, and if it comes to a default then investors might get less than the face value of the bonds.

I would say what I said the last time they came up with a NCD, which is that you shouldn’t be exposed to a lot of this in your debt portfolio. The yield is good, the company is currently doing well,  and that makes it easy to get swayed by the high yield and put in a big sum in it, but I think that won’t be wise.

You don’t want a lot of your money in just one type of debt instrument simply because if anything were to go wrong with that one thing – it will be devastating for your portfolio. I know it doesn’t look probable right now, but it didn’t seem probable that the Sensex will close near 15,000 at the beginning of the year either.

This post is from the Suggest a Topic page. 

The latest company to offer 80CCF infrastructure bonds is IFCI, and they also happen to have the highest interest rate (but not by that much).

The 10 year option offers 9.09% which is 9 basis points higher than the IDFC and L&T Infrastructure issue, and the 15 year option has 9.16% which is 16 basis points higher than the other issues.

Since this issue is unsecured as opposed to the other issues that were secured, and the credit rating of this issue is lower than the other ones – I would think that this extra bit of interest rate isn’t enough of a sweetener to make a change in anyone’s preference.

The issue opened on the 30^th November 2011 and will close on January 16 2012, so of all the issues that have come out so far – this one will remain open the longest.

There haven’t been any additional questions about infrastructure bonds since the last time I wrote about them so I will keep this a short post, and present the key information of this issue in the table below.

Like the other bonds – these one will list on the stock exchange after the initial 5 years are over and they will list on the BSE.

I can’t think of adding anything else, but if you have any questions or observations then please leave a comment.