Budget 2013: Tax Free Bonds

In an attempt to boost the infrastructure sector, the finance minister has proposed to extend tax-free bonds for this year as well up to 50,000 crore. Tax-free bonds are secured, redeemable, non-convertible debentures issued by government entities to individuals and institutional investors to mobilize funds needed for projects in the infrastructure development sector. So far this year, organizations including Indian Railway Finance Co. Ltd, Power Finance Co. Ltd, Rural Electrification Corp. Ltd, Housing and Urban Development Co. Ltd and Indian Infrastructure Finance Co. Ltd have raised at least one tranche of funds via such bonds. These are long-term in nature with maturity periods ranging from 10 to 20 years. The coupon rates are linked to the prevailing 10-year government security yield. The interest earned by investing in these bonds is tax free and at present the range of coupon is around 7-7.6% per annum.

The finance minster said that in 2012-13, institutions allowed to issue tax-free bonds are collectively expected to raise around 25,000 crore, much lower than the sanctioned limited of 60,000 crore announced in last year’s budget and also lower that the collection of 30,000 crore in FY12. One of the reasons for muted collection in the current fiscal is that the long-term nature of such bonds. Moreover, the commission structure this year was such that applications for high networth individuals were getting distribution commission of only around 15 basis points, which is relatively low.

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