IRFC Tax Free Bonds

Fund raising through tax free bonds gained momentum as the Indian Railway Finance Corporation (IRFC) and HUDCO announced their plans to raise an aggregate of Rs 10,985 crore by way of tax free bonds and in all likelihood they are set to be fully subscribed.

NHAI had earlier come out with its tax-free bond to raise up to Rs 10,000 crore and was successfully subscribed. Sources close to the development say that the NHAI bond was oversubscribed 2.5 times i.e. subscribed for Rs 25,000 crore.

Non Resident Indians are also eligible to invest in these bonds on repatriation as well as non-repatriation basis. In my opinion this tax-free interest bonds provide an excellent investment opportunity as the coupon offered under both the series is quite attractive. Moreover, highest rating of AAA from CRISIL and ICRA, makes it a safe investment avenue. Since this is a long term investment for 10-15 years, you are guaranteed to get assured/fixed tax free return for the entire periods even if your tax status has been changed from non-resident to resident. It is true that NRE Term Deposits now a day’s offer tax free interest rates in the range of 8-9.50%, but once your tax status changed to resident, you will be liable to pay tax on the income generated from this NRE deposit. So it is highly recommended all NRIs should subscribe for this tax free bond. Those NRIs who have PIS account can apply these bonds online. For more details, please keep in touch with your share broker. Interest rates are at peak level; best time to invest in fixed income tax free instruments. Interest rate cycle has peaked out . Given the sharp slowdown in the industrial activity and softening of the food inflation, the interest rate cycle has peaked out. Reserve Bank of India has restrained from increasing the interest rates in the last policy review meet and is expected to begin reducing rates in March or April 2012. The bond yields which have increased close to 9% levels have corrected significantly and show easing of pressure on rates. Indian Railway Finance Corporation Ltd•Issue period: 27 January 2012 to 10 February 2012.•Issue of Tax Free Secured Redeemable Non Convertible Bonds•Basis of allotment: On a first-come-first-serve basis within each category•The income by way of interest on these Bonds is fully exempt from Income Tax and shall not form part of Total Income as per provisions under section 10 (15) (iv) (h) of IT Act, 1961.•There will be no deduction of tax at source from the interest, which accrues to the bondholders on these bonds irrespective of the amount of the interest or the status of the investors.•Wealth Tax is not levied on investment in Bonds under section 2 (ea) of the Wealth -tax Act, 1957.Investment Opportunity:High post tax yield for triple A rated product
Tax free bond with yield of 8% – 8.30% is comparable with yields offered on government bonds and offer extremely attractive pre-tax yield close to 12% for a long period of time. The bond issue has got AAA (stable) rating from the rating agencies – Crisil, ICRA and CARE. The bonds would also be listed and tradable on NSE/BSE.Company Overview:•Financing arm of the Indian Railways•Notified as a Public Financial Institution under Section 4A of the Companies Act, 1956•Registered as a NBFC-ND-IFC (Infrastructure Finance Company) with Reserve Bank of India•100% shareholding held by Government of India•Consistently profit making Public Sector UndertakingTerms of the Issue:Particulars Issue details
Face Value per Bond Rs 1,000
Tenor 10 years 15 years
Minimum Application Rs 10,000 (in multiples of Rs 5,000 thereafter) Rs 10,000 (in multiples of Rs 5,000 thereafter)
Interest Rate % p.a. (Category I & II) 8 8.10
Interest Rate % p.a. (Category III) 8.15 8.30
Frequency of Interest payment Annual Annual
Issuance Demat form or physical form Demat form or physical form
Interest on application % p.a. 8.00
Interest on refund % p.a 4.00


Issue Structure:
Category I Category II Category III
Upto 45% of Overall Issue Size* Upto 25% of Overall Issue Size* Upto 30% of Overall Issue Size*
QIB & Corporate Individuals & HUF applying for more than Rs. 5 Lakhs Individuals & HUF applying for upto Rs. 5 Lakhs
*on first come first serve basis to be determined on the basis of date of receipt of applications duly acknowledged by the Bankers to the Issue.

Important FAQ·

Is there a lock-in period for these bonds?

No, these bonds do not have any lock-in period. The bonds would be traded onto recognised stock exchange and thus can be purchased and sold at the prevailing market prices on the exchange. If one wishes to hold until maturity, then the redemption would be made by the issuer. ·

Is interest on these bonds Tax Free?

Yes, the interest which one will earn would be exempt from tax. · Will TDS be deducted from the interest payment?

These bonds are tax free and hence not subject to TDS. ·
Is demat account mandatory to invest in tax free bonds?

The bonds can be held either in demat or physical form. But if one wish to trade onto the exchange, then it can happen only via demat mode. · Are investments in these bonds eligible for deduction u/s 80C?

The sum invested in these bonds is not eligible for any deduction under section 80C, 80CCF or 54EC. Hence, no deduction benefit is avail while one invests money into these bonds. However, as mentioned earlier the interest which you enjoy will be fully exempt from tax, and therefore no TDS will apply as well. However, capital gains on these bonds are taxable like normal corporate bonds.

Thus, if the bonds are sold within one year of the date of purchase, the short-term capital gains arising would be subject to tax at slab rates. Similarly, if the capital gains are made after a holding period of one year, long term capital gains will be applicable at 20% with indexation benefit or 10% without any indexation benefit. · Can a minor apply to these bonds?

Yes, a minor can apply for these bonds, but only and only through a guardian. ·

Can one apply in joint names?

Yes, one may apply in a joint name. However, the demat account will also be required to be held in joint name and the order of applicant shall be the same as appearing in the demat account. Moreover, all payments will be made out in favour of the first applicant as well as all communications will be addressed to the first named applicant whose name appears in the application form and at the address mentioned therein. · Who will get the interest in case of joint application?

In case of joint application, interest will be accounted to the first holder only.
My demat account is in joint name, but I want to apply is a single name?

In case of a single application, demat account of the same single applicant would be necessary. Joint demat account would not do. · If I’m an NRI can I invest in these bonds?

Yes, NRIs are eligible to invest in these bonds.

Whether an applicant applying in the first day of opening of the issue is assured of allotment? The issue will remain open for at least 3 days. If the issue is over-subscribed within this period, the applicants will receive allotment on pro rata basis. Thus investors who have applied during this period will receive at least some allotment. If issue extends beyond 3 days, the applicant in first 3 days will receive full allotment.

In whose favour the cheque is to be made?

Cheques/Drafts have to be made in the favour of

“IRFC Tax Free Bonds – Escrow Account – Tranche I" - for Non NRI’s

“IRFC Tax Free Bonds – NRI Escrow Account – Tranche I" - for NRI’s

“IRFC Tax Free Bonds – FII Escrow Account – Tranche I" - for FII’s * The coupon rates of 8.15% p.a. and 8.30% p.a. shall be payable only to the original allottees under Category III for the Tranche 1 and Series I Bonds and Tranche 1 and Series II Bonds respectively and shall not be payable to the transferees in case the Bonds are transferred or sold by the original allottees Please refer to the final prospectus for details.

In my opinion these tax-free interest bonds provide an excellent investment opportunity as the coupon offered under both the series is quite attractive. Moreover, highest rating of AAA from CRISIL and ICRA, makes it a safe investment avenue. Also the listing and trading of the bond (on BSE and NSE), facilitates a liquidity window to investors as one can exit even before the maturity / redemption date of these bonds, but as said earlier one need to hold these bonds in a demat mode. IRFC has smartly introduced the step-down feature which states that any buyer in the secondary market will only get non-retail (HNI and QIP) investor rate. The step-down feature is obviously to encourage serious investors to subscribe for the issue instead of trying to make a quick buck by swiftly selling it in the secondary market.Note: This is just for the general information of the readers; please refer the final prospects or take advice from your financial planner before investing http://irfc.nic.in/index1.asp?lang=1&linkid=64&lid=200