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Tax-free bond options for the New Year

Tax-free bond options for the New Year

The final quarter of the financial year is when we think of Section 80C as a way to cut our tax liability. But there are four tax-free bonds available for subscription currently.

Your company is probably asking you right now to submit receipts that prove you made investments in schemes eligible for a tax deduction. But while your mind is on PPF or 5-year bank FDs, don’t forget about tax-free bonds. You have four options – from National Housing Bank (NHB; closes January 31 [oversubscribed]), Housing and Urban Development Corporation (HUDCO; closes January 10), Indian Railway Finance Corporation (IRFC; opens on January 6) and India Infrastructure Finance Company Ltd (IIFCL) – up for subscription right now or in the coming weeks. They’re offering good returns and are well worth considering if you’re looking for a long-term investment.

Why these investments are good
If you have a long-term view, tax-free bonds are most definitely a good option, particularly if you’re in the top-most tax bracket. This is because any fixed income investment requires you to pay tax on the returns, usually at your slab rate. With tax-free bonds, no tax is to be paid. Therefore, if you lock your money into an FD and tax-free bond, both offering 9% today, you’ll end up receiving a return of just 6.3% on the former and 12.5% on the latter.

What’s on offer?
All the bonds are being offered by government-backed companies, so even while their ratings differ, it’s alright to focus only on the returns if you’ll stick with the bond until maturity. Not that there’s much to choose between the four companies. Here’s a table of what’s on offer:

Issuer 10-year 15-year 20-year Credit Rating
IIFCL 8.66 8.73 8.91 AAA
IRFC 8.48 8.65 na AAA
HUDCO 8.76 8.83 9.01 AA+
NHB 8.51 8.88 9.01 AAA

What to buy?
As said above, if your intention to stay invested for the full term, just pick the one that’s offering the best rate. So, for example, if you want the 20-year bond, you could pick NHB or HUDCO, as they are offering 9.01%, while IIFCL is offering 8.91%. However, if it is likely that you will need the money beforehand, it would make better sense to hold better rated paper. Therefore, HUDCO would be a poorer option than NHB. Remember, however, that if you’re looking to sell before the term is up, you would be paying tax on the returns you earn.

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