Tax free bonds are back!

Remember 6.5% tax free bonds issued by RBI, which were dis-continued in July, 2004. Now RBI only issues 8% taxable bonds.

Govt of India has decided to re-introduce tax-free bonds, as part of the stimulus package for the economy. But this time they are being floated by IIFCL and not by RBI.

Its features:
- Comes with sovereign guarantee ( it means that the returns are guaranteed by Govt. of India )
- Coupon rate is 7.5 % ( much better than the older RBI 6.5% tax-free bonds )
- Will have a lock-in period of atleast 10 years
- The first issue will be through private placement, but the subsequently there will be a public issue as well.
- I speculate that they will be listed on atleast on one of the stock exchanges ( probably, BSE ) in order to provide early exit option to investors.

The article in link, also describes how this scheme is going to work:
- IIFCL raises money through these bonds at 7.5%
- IIFCL pays 0.25% annually to the Central Govt. for the sovereign guarantee it offers
- IIFCL lends this money to banks at 8.5%
- Banks can then use this to re-finance infrastructure projects at any rate between 8.5% - 11%

Tax-free bonds are a very good option for HNIs ( High-net worth individuals ) and those in the higher tax slab ( i.e. 30% ). Individuals in the lower tax slab may stick with Bank FDs, since they are offering higher yields presently.