TAX FREE BONDS

1. TAX FREE BONDS A brief and expectations for 2012-13

2. Tax free bonds: an overview Features • The interest income on the bonds is not taxable/exempt. No TDS is deducted at time of interest payment • Tenure: Choice of 10 years and 15 years • Proposed to be listed on NSE and BSE • No lock-in period • Secured issue • Either in Demat or Physical form • PAN is Mandatory Advantages • The bonds are issued by good rated central public sector undertakings and are considered very safe. • The Interest income on the bonds is tax free • No cap on amount of investment eligible for tax benefits • Bond can be sold in secondary market without any lock-in period • Bonds are listed The central government in its budget for FY 2011-12 announced tax free bonds of 30,000. Subsequently 5 public sector enterprises raised Rs. 30,000 Crores mainly through public issues. The bonds were all long tenor in 10 and 15 years options The issuers were: In the later three issues, the company offered a higher yield (by 10-15 bps) to retail investors.

3. Last year’s subscription • The HNI category was oversubscribed in all the issues indicating huge demand from the segment. • Most of the issues were oversubscribed on the first day. • All the issues of last year are listed on exchanges and are trading at a premium. The five issues last year received huge response from investors and most were over subscribed. The table below shows the issue size and over subscription in each of the issues.

4. Price movement on interest rate movement There is an inverse relationship between the price of a bond and the yield investors require on the bond. A person will be willing to pay more for an 8% bond when the other investments in the economy provide a lower yield. The required yield on a bond depends mainly on the general interest rate levels and the credit quality of the bond issuer. The table on the right gives illustration of movement of price with interest rate movement.

5. RETAIL BENCHMARKS *Post tax return at tax bracket of 30%. The effect of Section 80C deduction is not taken in calculation of post tax returns. ** Data represent category average picked up from valueresearchonline.com The above data has been extracted on 3rd October 2012 from respective websites of the issuers and other information available in news.

6. Pre-tax and post-tax yields Higher the tax bracket, greater the pre tax yield: • These are thus highly attractive when compared to other low risk fixed income alternatives. The coupon received on these bonds are exempt from tax by the virtue of Section 10(15)(iv)(h) of Income Tax Act,1961 The coupons should thus be adjusted for tax rate and made pre-tax for comparison with other fixed income products. The yield is adjusted as: The higher the tax bracket of the investor, the greater benefit he derives from the tax free status, the greater the pre tax yields for the investor. The following table shows the yields on the past issues.

7. Effective yields for Individuals/HUFs Effective Returns for a male/female assessee less than 60 years of age Effective Returns for a male/female assessee more than 60 years and less than 80 years of age

8. This year’s schedule The budget for FY 2012-13 announced sanction of 60,000 crores tax free bonds to the following entities: Most of the issuers are likely to go for the public issue route to raise the funds and mobilize investments from retail investors. Rs. 50 Lakh Crore is proposed to be invested in Infrastructure in the Twelfth plan and half of this is expected from the private sector. Tax free bonds would provide low cost long term finance to the public sector infrastructure space.

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