Tax Free Bonds 2015-7.62% NTPC Tax-Free Bond of September 2015

After almost a gap of a year, once again Tax-Free Bonds hitting the market. The first one in this year is from 7.62% NTPC Tax-Free Bond. The issue for subscription opens on 23rd September, 2015. Let us see its feature and who can invest in these bonds.

Let us first understand about the NTPC Company-

The company started in the year of 1975. As of now, Government of India holds around 74.96% of the shareholding. It is the largest power generation company in India. Its total contribution to the country’s requirement stood at around 23%.

What are Tax-Free Bonds?

In simple terms, it is nothing but lending to NTPC. In return, they give you an interest rate, which in the fixed income world called as a coupon.

This particular NTPC Tax-Free Bond is called “Tax-Free, Secured, Redeemable and Non-Convertible Bonds” Let us see the definition of each word mentioned.

• Tax-free Bonds-The interest income received by such bonds is tax-free. However, you will not get any tax benefits by investing in such bonds (Example like Sec.80C). Therefore, it is a tax-free bond, but not tax saving bond.
• Secured Bonds-Your invested money is safe as the company set aside the equal amount of the asset to pay in case of default or bankruptcy.
• Redeemable Bonds-A bond that can be called by an issuer (In this case it is NTPC) for redemption.
• Non-Convertible Bonds-You cannot have the option to convert the bond holding into converting as a stock or shares of a company.

Features of NTPC Tax-Free Bond–

• Issue start date is 23rd September, 2015.
• Issue end date is 30th September, 2015.
• The face value of a bond is Rs.1, 000 each.
• Minimum investment should be Rs.5, 000 (5 bonds).
• There is no upper limit for maximum investment.
• Interest earned is fully tax-free and no TDS.
• Credit Ratings: AAA/Stable by ICRA, AAA by CRISIL and by CARE
• Tenure-10 Yrs, 15 Years, and 20 Years.
• Interest Payment-Annually.
• Coupon Rate will be 7.36%, 7.53%, and 7.62% respectively for 10 Years, 15 years and 20-year bonds.
• You can nominate also.
• After issue, the bonds will be listed in NSE and BSE.
• You can hold only in Demat format.

Other features are as below.

These are the basic features of this bond. If you need a detailed explanation of the same, then visit NTPC Tax-free Bond 2015 Prospectus.

Whether you can invest?

Those who are fond of SAFETY, CONSTANT INCOME, and LONG TERM INVESTMENT can go ahead with such products. But do remember that this company does business in a power sector and act like a puppet in the hand central government. Hence, the company may face a lot of political or social hurdles for growth.

Believing purely on current rating may not be a good idea. Because ratings are dynamic in nature and at any point of time they may change or lower the ratings. Latest example is about Amtek Auto issue (Read the story in my earlier post at “5 Unknown Mutual Fund Risks !”).

This is a long-term investment. Hence, whoever feels that they are comfortable with the return generated by such products can definitely consider it. Liquidity is an issue. Because even though such bonds listed in the market (NSE and BSE), they hardly trade. Hence, you may end up in NO BUYER situation.

I feel PPF a better option than these bonds. Because you get the tax benefit while investing as well as at maturity. But yes, the interest fluctuates on yearly base which is not the case with these bonds.

Few reviews suggested that due to a lower inflation rate and RBI about to decrease the interest rate, these bonds may find value in a secondary market. But such selling in secondary market attracts capital gains tax. If you sell the bonds within a year, then it is considered as Short Term Capital Gain and profit is taxed as per your tax slab. However, if your holding period is more than a year, then it be considered as Long Term Capital Gain and taxed at 20% with indexation benefit.

However, if you are expecting a constant stream of tax-free income, then such investments are best options. But do remember that if your goal is long-term wealth creation, then you may end up in loss due to this bond’s annual interest payout. If you invest such interest wisely then it can provide you a great compounding effect. Otherwise a huge drawback point.

Hence, my suggestion is to go for this bond only in case you are looking for a constant tax-free return for the long term.

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