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Infra Bonds: A Boon for Fixed Returns Seekers

The tax free income from these bonds make their effective returns lucrative, especially for those in the high tax bracket

From a savings and investments perspective, the big news of the moment is not from the usual suspects like the stock markets and funds but tax-free bonds from the National Highway Authority of India. Since the income from these bonds is not taxable, on a tax-adjusted basis, the effective returns from these bonds can be as high as 12 per cent. Moreover, the real value of the bonds comes from the fact that they have arrived at the peak of the interest rate cycle and are a great opportunity to lock in a high fixed return for an extended period of time. The effectively sovereign nature of these bonds also gives them a level of safety that infrastructure bonds do not have.

From a broader perspective too, the issuance of instruments like this should cheer up savers. What signifies is that all the straight-and-narrow that the new direct taxes regime had threatened will likely have a steady stream of exceptions like these bonds. After all, the idea behind the DTC was that the tax rates would be lenient but the list of the exemptions would be small (or non-existent).

However, the reality is that the concept of using tax-breaks and exemptions to guide funds to specific uses is perhaps too deeply ingrained to throw out. Thus, investors can look forward to plenty of more opportunities like this one.

One aspect of the NHAI bond issue that deserves some attention is the relatively poor response for the retail portion. Apparently, not only is this part undersubscribed, there are enough reports that much of the subscription is on behalf of HNIs. I'm not sure what the problem is. It could be that retail interest requires a different approach to marketing the product or it could be that the product itself is not very attractive to the small investor. Either way, there is little point in having a reservation for small investors that goes abegging.