India clarifies provision for company investments in tax free debt: sources

MUMBAI (Reuters) - The government stated that companies will be allowed to invest in domestic tax free bonds where the effective rate of returns is greater than the prevailing bank rate, according to a circular from the Ministry of Corporate Affairs seen by Reuters.

The circular clarifies a key provision that had been seen hampering company investments into tax free bonds, given the provision was interpreted as preventing companies from investing in debt where the "rate of interest" is lower than the bank rate.

That had raised confusion because tax free bonds offer a lower interest rate, ranging from 6.75 percent to 7.50 percent, but the returns are effectively higher since they are exempt from taxes.

The circular clarifies that tax free bonds would not violate this provision in cases where the "effective rate of return" is greater than the bank rate.

Reuters confirmed the existence of the circular with three separate company sources who declined to be identified because the Corporate Affairs Ministry has not publicised the circular.

The government has allowed 500 billion rupees worth tax free bonds to be issued in fiscal year 2013/14, the majority of which is intended for retail investors.

Companies can invest in up to 10 percent of that total amount, or 50 billion rupees.

(Reporting by Archana Narayanan; Editing by Rafael Nam)