National Highway Authority of India (NHAI) opened its fresh issue of NHAI bond series XII (54 EC bonds) from 1 April 2011. These bonds are open until 31 March 2012, but the issuer has the right to close the bonds earlier.
Who should invest
“If you’ve made long-term capital gains by selling a property you held for three years, you have to pay a 20% tax, but if you invest in bonds specified under section 54 EC of the Income-tax Act, like NHAI bonds, you don’t need to pay that 20% tax,” says Hasmukh Shah, a Mumbai-based chartered accountant.
Keep in mind that only long-term capital gains (LTCG) earned by selling a residential flat or independent house, which you owned for at least three years, can be invested in this bond. Any approved institution as well as the general public, including individuals, Hindu Undivided Family and non-resident Indians, can invest in these bonds.
Investment amount and tenor: Says S.K. Chauhan, manager (finance and accounts), NHAI, “You can invest a minimum of Rs 10,000 and a maximum of Rs 50 lakh. The face value is Rs 10,000 per bond and you can buy up to 500 bonds. The bond is available for three years and can be redeemed only after three years. The product features of this series of bonds is the same as that of the last series.”
These bonds are not non-transferrable and non-negotiable. Also, you can’t keep them as security against any loan or advance.
Interest rates: The bonds give an interest rate (coupon rate) of 6%, payable annually. The interest will be paid on 31 March every year.
Tax: There is no tax deduction at source on the interest paid, but the interest earned is taxable. The interest gets added to your income.
Where can you buy
The bonds are available at all branches of Union Bank of India, IDBI Bank Ltd and select branches of HDFC Bank Ltd, Canara Bank, Punjab National Bank and Syndicate Bank Ltd. You can download the form from www.nhai.org or get it from an authorized bank. Attach the required documents and funds and submit at one of the banks mentioned above.
Should you invest
Assuming indexation benefit, let’s says you made an LTCG of Rs 10 lakh after selling a property. If you go ahead and invest this entire amount in NHAI bond, which offers 6% rate of interest, and assuming that you are in the highest tax bracket, your post-tax returns will be 4.2% and your investment of Rs 10 lakh will become Rs 11,31,366.
Alternatively, if you choose to pay 20% tax on Rs 10 lakh, which comes to Rs 2 lakh and invest the remaining Rs 8 lakh in any one of the three instruments, a fixed deposit (FD), mutual fund (monthly income plan, or MIP) and an equity-oriented mutual fund, you will end up with Rs 9,80,034, Rs 10,94,105 and Rs 12,16,700, respectively.
For FD, the rate has been assumed at 10%, but the post-tax return will be down to 7% for those in the highest tax bracket. For MIP, we have assumed 11% and for equity fund 15%. Though returns from the two mutual fund options are comparable with that of the bond, remember that they are market-linked and are not guaranteed.
Says Ranjit Dani, Nagpur-based certified financial planner, “If you do the calculation, you will realize that 12% rate of return is a break even point. Which means, you may consider paying a 20% tax on LTCG and investing in an alternate instrument only if your expected return is more that 12%. Anything less than 12%, it’s best to invest the amount in 54 EC bonds.”
Keep in mind that when you invest in bonds you get a benefit of saving 20% tax on LTCG. More importantly, this is a risk-free investment and there is no cost in the form of any brokerage. For risk averse investors, these bonds make sense.
If you want to buy these bonds, you better hurry up even though the last date is 31 March 2012; NHAI can close these bonds before that date.