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DECODED: NHAI Secured Redeemable Non Convertible Bonds

  • WHAT IS NHAI? National Highways Authority of India (NHAI) is an autonomous body under the ministry of road transport and highways and is entrusted with management of a network of 70,934 km of national highways.

  • WHAT ARE HIGHWAY BONDS? NHAI is raising money in the form of a public issue of interest tax-free secured redeemable non-convertible bonds. The issue is expected to remain open until January 11, 2012, but could also close earlier. The minimum application amount is Rs 50,000 (50 bonds).

  • WHAT DOES IT OFFER? These highway bonds are being issued in two series — ‘tranche 1 series 1’ having a tenure of 10 years and ‘tranche 1 series 2’ having a tenure of 15 years. The former offers an interest rate of 8.20 per cent per annum, while the latter would offer 8.30 per cent per annum. The interest would be paid only once a year on October 1.

  • HOW ARE THEY SECURED? Both series of bonds will be secured by way of charge on immovable properties located in Ahmedabad and exclusive first charge on fixed assets of NHAI. The highways are not assets of NHAI.

  • HOW WILL BONDS BE REDEEMED? The bonds will be repaid at the end of the 10/15 years from the date of allotment.

  • WHAT IS SPECIAL ABOUT THESE BONDS? The income by way of interest on these highway bonds is fully exempt from income tax and will not form part of your total income, regardless of your income tax bracket.

  • However, no deduction from your total income will be available for invested amount, like in case of investments in infrastructure bonds, life insurance or tax-saving mutual funds as well as tax-saving bank deposits.

  • FC VERDICT: State Bank of India (SBI) 10-year term deposit is offering 9.25 per cent interest rate, while the NHAI bonds for the same tenure offer 8.2 per cent. For investors comparing these bonds with bank deposits, the interest on NHAI bonds is tax-free, whereas, normal bank fixed deposits (FD) interest is taxable at the individual’s tax slab.

  • So, for investors in the tax bracket of 20.6 per cent and 30.9 per cent, the rate of post-tax return from the 10-year NHAI bonds will be better than 10-year bank FDs (SBI for example).

  • Unless non tax-free interest rates offered by banks in term deposits reach 12 per cent, which is unlikely in a falling rate scenario, investors in highway bonds, irrespective of their individual tax bracket, will always get better yields on a post-tax basis.

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