Rising yields to fetch more returns for tax savers

With government bond yields trading close to three-year high levels, investors can expect attractive coupon rates on tax-saving bonds from infrastructure finance companies.

PTC India Financial Services and Infrastructure Development Finance Company (IDFC) are expected to announce bond issuances in November. These would be linked with the yields on government bonds on the last trading day of this month.

Yields on the ten-year benchmark government bond closed at 8.75 per cent on Monday, up 30 basis points from the closing on September 29. Market participants expect yields to rise further, as investors accommodate government borrowings of Rs 12,000-15,000 crore every week.

“Bond yields may touch nine per cent by the end of this month, if the central bank raises rates by 25 basis points,” said a treasury head of a Chennai-based public sector bank. The Reserve Bank of India (RBI) is scheduled to announce its half-yearly monetary and credit policy review on October 25. RBI has raised policy rates by 150 basis points this financial year, leading to a rise in bond yields.

After securing the approval of the finance ministry, Power Finance Corporation and Industrial Finance Corporation of India (IFCI) had launched tax-saving bonds in September. Both offer coupon rates of 8.5 per cent per year for 10 years, and 8.75 per cent per year for 15 years. Subscriptions for issuances from PFC close on November 4, while those for IFCI close on November 14.

According to norms, issuers cannot offer coupon rates higher than the previous month’s annualised closing yield on government bonds of the same maturity, as reported by the Fixed Income Money Market and Derivative Association of India. The annualised closing yield for ten-year government bond stood at 8.62 per cent in September.

“Subscriptions in PFC and IFCI tax-saving bonds are yet to pick up, as yields are moving up and investors are expecting higher yields next month,” said a bond arranger with a domestic brokerage.

A senior PTC official said the company was yet to take a call, as yields were high and the response hadn’t been good for existing papers. “Yields are very high now. We would take a call next month,” he said.

IDFC is also planning to raise funds in November. “If bond yields are high, the coupon rates would need to be adjusted accordingly,” said a senior IDFC official.

L&T infrastructure Finance and India Infrastructure Finance Company are also expected to come out with tax-saving bond issuances in November. Tax exemption of up to Rs 20,000 can be availed of by investing in long-term infrastructure bonds. This is above the existing tax savings limit of Rs 1 lakh.