No Investment Cap On 7% Tax Free New Bonds

The government today decided not to cap investments in seven per cent tax free bonds announced by finance minister Jaswant Singh in Parliament last month. The 7 per cent tax free bonds will have a six year tenure.

Finance secretary S Narayan told Business Standard that the government decided against prescribing a ceiling for the bonds to infuse a "feel good factor" in the economy. He said, "The bonds will be available for subscription only to individuals and HUFs (Hindu undivided familes). It will also not be tradeable in the secondary markets." Corporates and proprietary concerns would be ineligible to invest in these bonds.

Likely to be called, 7 per cent Tax Free Bonds 2002, these would be available for subscription till February 28, 2003. The 7 per cent tax free bonds too would be managed by the Reserve Bank of India along with the eight per cent Government of India bonds.

The 8 per cent Relief Bonds, however, have a tenure of only five years and also carry investment ceiling of Rs 2 lakh per subscriber.

Narayan said the government expected to mop up significant funds through the new 7 per cent bonds. He said, from the next financial year, the bonds would be indexed to the yield on government securities. "The interest rate on the tax free bonds would not be arbitrarily fixed. It will depend on the movement of yields on g-secs through the year," he said.

According to finance ministry officials, the bonds will be transferable or can be bequethed to the nominee if the primary holder passes away. Also, the bonds can be gifted to close relatives as defined in the Income-Tax Act, they added.

Officials said, for investors in the highest income tax bracket, the bonds offered an effective interest rate of over 10 per cent. High net worth individuals will still find these bonds the most attractive investment option, officials said.

The finance ministry expects to mop up about Rs 15,000 crore from the new bond series. With a drought-like situation persisting throughout the year, the amount raised through the tax free bonds would come as a breather for the government.

The government had done away with the ceiling on the 8 per cent Relief Bonds for retired government employees to the extent of their superannuation benefits.

The new bonds would help the government in two ways, officials said. Not only would it reduce the cost to the government by over 100 basis points, it would also better directed at small investors since it cannot be traded in the secondary market.