Personal Finance

Green signal for IRFC tax-free bonds

Dhuraivel Gunasekaran | Updated on November 16, 2018 Published on November 10, 2018

Three series of the bonds, with YTM of 6.4-6.7%, are traded actively in both BSE and NSE

Conservative investors, including retirees, who are looking for an investment avenue that provides capital safety and decent returns can consider buying tax-free bonds that are available in the secondary market.

The Centre permitted 13 State-owned entities to issue tax-free bonds during FY12-FY16. The interest paid on these bonds are totally exempt from income tax.

These tax-free bonds are listed in the secondary markets, and traded actively. Many tax-free bonds are available at a yield-to-maturity (YTM) close to 6.5 per cent. Among these, the bonds issued by the Indian Railway Finance Corporation (IRFC) look attractive.

How to buy

Tax-free bonds are listed and traded in the cash segment along with the equity shares on the BSE and the NSE. Retail investors can buy and sell them through a demat account. Many brokers facilitate investors to transact in tax-free bonds through their online terminals.

IRFC was permitted to issue tax-free bonds in FY12, FY13, FY14, FY15 and FY16. Rating agencies CRISIL, CARE and ICRA have rated the IRFC tax-free bonds with the highest rating of ‘AAA’.

Totally, IRFC has issued 24 series of tax-free bonds. Three series of IRFC tax-free bonds, with YTM of 6.4-6.7 per cent, are traded actively in both the exchanges.

For instance, IRFC NO series — with a coupon rate of 7.64 per cent and residual maturity of 12.5 years — trades with a YTM of 6.6 per cent on the NSE.

Since the interest paid by tax-free bonds are exempt from income tax, the current yield of 6.6 per cent translates into 9.4 per cent of pre-tax yield for investors in the 30 per cent bracket. This makes it a more viable option than bank fixed deposits for retail investors. Currently, public and private sector banks offer 6-8 per cent pre-tax interest rate for their five-year FDs.

These three series of IRFC tax-free bonds have been trading with good liquidity — with a daily average volume of 1,700 units or more in the past one month. Further, these bonds are available with a residual maturity of 3.4-12.5 years. Investors can buy the bonds that match their investment horizon.

Selling tax-free bonds in the secondary market attracts capital gains tax. If you sell these bonds within 12 months from the date of purchase, you will have to pay tax on the gains as per your tax slab. If you sell after 12 months, tax has to be paid at a flat rate of 10 per cent. No indexation benefit is available.

About the company

IRFC, the financial arm of the Railways, functions under the Ministry of Railways. The company derives substantial business and financial support from Centre as the latter owns it 100 per cent. As of March 31, 2018, IRFC’s net worth was ₹13,565 crore and capital adequacy ratio was 214.75 per cent. The Centre has been infusing equity capital at regular intervals to support IRFC’s capital structure. IRFC has very strong asset quality as it lends predominantly to the Railways. Till date, IRFC has had zero non-performing assets .

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