Personal Finance

Ride on NHAI tax-free bonds

Dhuraivel Gunasekaran | Updated on November 02, 2018 Published on October 27, 2018

These tax-free bonds are actively traded on BSE and NSE

The uncertainty created by the IL&FS crisis in the bond market last month has made fixed income investors jittery. Many debt mutual funds, ULIPs (unit-linked insurance plans) and NPS (National Pension Scheme) funds that held IL&FS bonds in their portfolio witnessed a sizeable drop in their NAV (net asset value).

Capital safety has now become a prime concern for most investors. At this juncture, investors looking for debt instruments that provide capital safety and decent returns can consider tax-free bonds available in the secondary market.

Tax-free bonds that were issued by State-run infrastructure financial companies over the past five years, are listed on BSE and NSE, 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 National Highways Authority of India (NHAI) look attractive.


The Centre had permitted 13 State-owned entities — including NHAI, PFC, IRFC, HUDCO, REC, IIFCL, JNPT, NHPC, NTPC, NHB and NABARD — to issue tax-free bonds during FY12-FY16. The interest paid on these bonds do not form part of the investor’s total income as per the provisions of Section 10 (15) (iv) (h) of Income Tax Act, 1961, read along with Section 14A (1) of the Income Tax Act. These bonds were issued with a long maturity of 10 years or more.

One has to look at three parameters while buying bonds from the secondary market — liquidity, YTM and credit rating.

Since these entities are backed by the government, the investments made in tax-free bonds enjoy capital safety. Further, the bonds issued by most of these companies are rated ‘AAA’ by CRISIL, ICRA, India Ratings and CARE. Instruments with ‘AAA’ rating are considered to have the highest degree of safety with regard to timely servicing of financial obligations.

According to data compiled by HDFC securities retail research, out of the 190 listed tax-free bond series, 25 are actively traded with good volumes, either on BSE or NSE or both.

The tax-free bonds issued by NHAI are actively traded on NSE with relatively higher YTM and liquidity. NHAI was permitted to issue tax-free bonds in FY12, FY14 and FY16. In all, it has totally issued 14 series of tax-free bonds.

Better yields

Five series of NHAI tax-free bonds, with YTM of 6.4-6.6 per cent, are traded actively in both the exchanges. For instance, the NHAI N2 series (ISIN INE906B07CB9) — with a coupon rate of 8.3 per cent and residual maturity of 8.2 years — trades with a YTM of 6.5 per cent on NSE.

Since the interest paid by tax-free bonds are exempt from income tax, the current yield of 6.5 per cent translatesto 9.3 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 five-year FDs.

HDFC securities data show that each of the five series of NHAI tax-free bonds have been trading with good liquidity — with a daily average volume of 1,800 units or more in the past one month. Higher liquidity helps you buy or sell the bonds at the desired price and quantity. Further, these bonds are available with a residual maturity of 3.2-12.4 years. Investors can buy those bonds that match their investment time horizon.

Retail investors can buy and sell tax-free bonds through a demat account. Keep in mind that 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. There is no indexation benefit available.

The Central government holds 100 per cent stake in NHAI. The company receives continuous support from the government in the form of capital grants, allocation of cess funds, additional budgetary support and guarantees for its market borrowing programmes.

During FY17, NHAI was awarded projects for a length of 4,335 km (as against 4,368 km in FY16 and 3,067 km in FY15). In October 2018, CARE reaffirmed ‘CARE AAA Stable’ rating for the long term tax-free bonds, worth ₹34,000 crore, issued by NHAI.

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