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IRFC Tax-Free Bonds: Good for Those in Higher Tax Brackets

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IRFC Tax-Free Bonds: Good for Those in Higher Tax Brackets
Investors who missed out on the previous three tax-free bonds issued by NTPC, PFC and REC can take a shot at the Indian Railways Finance Corporation's tax-free bonds that opened for subscription on Tuesday. IRFC is the financial arm of the Indian Railways.

Retail investors can earn an interest of 7.32 per cent annually on the 10-year IRFC bonds, 7.53 per cent on the 15-year bonds and 7.50 per cent on the 20-year bonds. The interest will be paid out annually.

After the recent repo rate cuts by the Reserve Bank of India, lenders have reduced the fixed deposit rates. For example, the biggest public sector lender, State Bank of India, is offering an interest of 7 per cent on fixed deposits of 10 years and above. So, for those falling in the highest tax bracket of 30 per cent, the effective rate of interest turns out to be 5 per cent; compared to that IRFC bond's post-tax return of 7.32 per cent looks lucrative.

The value of one bond is Rs 1,000; investors can subscribe to a minimum of 5 bonds in both demat as well as physical form.

The overall size of the issue is Rs 4,532 crore; the bond issue has three tenures - 10 years, 15 years and 20 years.

The bonds will be allotted on a first-come-first-served basis; if oversubscribed, the issue will be closed ahead of scheduled closure on December 21, 2015.

"As this issue size is big, the rate of over-subscription may not be as high as seen in the past issues but will see a good traction from investors as the interest offered is tax-free and is a good investment option for those falling in the 20 per cent and above tax bracket." said S V Prasad, chairman, Chime Consulting.

The issue has been rated "AAA" by all three rating agencies - ICRA, Care and Crisil.

The bonds will be listed on both BSE and NSE. So investors can exit from these bonds before maturity by selling them in the secondary market. The capital gains made by selling these bonds on the stock exchange before 12 months will be taxed as per the income tax slab of the bond holder. After 12 months, the capital gains will be considered as long term and will be taxed at the rate of 20 per cent post indexation and 10 per cent without indexation.

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