NHAI bonds: Low returns for risk averse

The National Highways Authority of India (NHAI) opened its fresh issue of bonds from April 1, which will remain open till March 31 next year.

Each bond has a face value of Rs 10,000 and you can buy up to 500 bonds — a minimum of Rs 10,000 and a maximum of Rs 50 lakh. You will earn an interest of six per cent annually to be paid on March 31 every year — low, if you consider returns of 8.5 and eight per cent given by the Employee Provident Fund and the Public Provident Fund, respectively.

The investment tenure is three years and you can redeem the bonds after this. These bonds are neither transferable nor negotiable. Also, these cannot be kept as security for loans or advance.

The good part is that these bonds offer tax benefits under Section 54EC of the Income Tax Act. Here, capital gains from sale of long-term capital assets as real estate, gold or shares can be reinvested in these instruments for tax exemption. The long-term capital gains tax is 10 per cent without indexation and 20 per cent with indexation. However, the interest earned is added to your income and taxed.

Those selling property and not willing to reinvest in any other property can put their money in the NHAI bond. The investment has to be made within six months from the date of transfer of the property to be able to claim the tax deduction. Importantly, this is a risk-free investment and has no brokerage cost.

However, if the long-term capital gains are over Rs 50 lakh and accrued after October 1, you can split the investment into two parts. You can invest Rs 50 lakh before March 31 and the remaining (up to Rs 50 lakh) on April 1. Tax benefits can be availed for a total of Rs 1 crore.

Keep in mind the long-term capital gains earned by selling a residential flat or a house, which you owned for at least three years, you can invest in these bonds. These bonds also make sense for risk-averse investors.

But financial planners are not enthused by these bonds because of low returns. Say, you receive capital gains of Rs 5 lakh, which you invest in NHAI bonds. At six per cent, your investment increases to Rs 595,508 after three years. Of which, Rs 95,508 is taxable.

Alternately, if you reinvest the amount in mutual funds, you have to pay a capital gains tax of 10 per cent without indexation. Post tax, if you invest the Rs 4.5 lakh in an equity-diversified fund, you will get 12-15 per cent returns on an average. At the end of three years, you would have earned Rs 6.32-6.84 lakh, tax-free. Equity diversified funds have returned nearly seven per cent annually. So, at the end of three years, you would have earned tax-free Rs 6.04 lakh.

If you want to buy these bonds, you should hurry as NHAI can close the issue before the last date if they mop-up the required amount.