Should you invest in tax-free infra bonds?

Good for tax saving, but long holding tenures and low liquidity may leave you weary.

Those looking to save tax should take note of the latest buzz in the debt markets. Power Finance Corporation (PFC) and Housing Urban Development Corporation (Hudco) have launched bonds that will help you save more tax than your regular infrastructure bonds. Soon, IRFC and NHAI are likely to follow suit with similar bonds.

K P Jeewan, general manager, debt markets, Karvy Stock Broking, says: "The coupon in these bonds are completely tax-free and those in the highest tax bracket can expect an effective yield of 10.75 per cent, compared to the 9.5 per cent a 10-year public sector bond would offer."

The PFC and Hudco offerings are of 10- and 15-year tenures, with coupon rates of 7.5 and 7.75 per cent, respectively. Unlike other regular tax-free infra bonds, the tax benefits in these bonds are not capped at Rs 20,000.

Even besides these tax free bonds, those in the highest tax bracket have had plenty of opportunities to invest in tax saving infrastructure bonds under 80 CCF in the last two years. Industrial Finance Corporation of India (IFCI), Indian Development and Finance Corporation (IDFC), Rural Electrification Corporation (REC), L&T and India Infrastructure Finance Company Limited (IIFCL) have flooded this space.

Killol Pandya, head of fixed income, Daiwa Asset Management, says: “Investors comfortable with locking in their money for a long time, will find these bonds useful. But one should only park, funds that they will not need anytime soon.”

These bonds have tenures of 10 years or, at times, even 15 years, and offer rates accordingly. The interest payout is yearly, and the different bonds also offer a buyback option. One of the primary reasons investors would consider these bonds is the additional tax savings on the interest earnings of Rs 20,000 over and above the Rs 1 lakh investible limit, which one would enjoy.

Ramesh Kumar, senior vice-president, debt markets, Asit C Mehta, says: “The 80CCF tax benefit is valid only for this year and should be utilised. Most of these bonds have a five-year buy back option with a 10-year tenure, so for a five-year investment horizon, this is a good option.”

If you are an investor who wishes to make the most of the tax break and have a low-risk and -return investment that you can hang on to for a long tenure, this is an asset to consider. Mahendra Jajoo, CIO, fixed income, Primerica, says: "The product has limited appeal and is suited for investors within the Rs 3-5-lakh tax bracket who can make the most of the Rs 20,000 tax-free investment portion. Interest income over that is taxable.

These bonds are benchmarked to the ten-year government bonds, and, with the bonds gaining basis points, the debt market retail space may see more action.