Should I Invest in NTPC Tax Free Bonds?

Written by Vidya Kumar

September 24, 2015

Executive Summary – NTPC has launched Tax Free Bonds with interest rate of 7.36% -7.53% p.a. depending on the tenure selected. It has been rated highly by the credit rating agencies. The interest earned will be tax-free. The article has a comparison of these bonds with FDs and PPF. If you are an individual in the highest income tax slab looking for a long-term safe investment product delivering modest returns, it is a good investment option.

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National Thermal Power Corporation (NTPC) has launched the issue of its tax-free bonds. It is a huge public sector company with strong fundamentals and government backing. It is the largest generator of power in India. The issue opened on September 23rd, 2015 and will close on September 30th, 2015.
Let us look at the key features of the bonds –

Minumum & Maximum Investment

An investor should invest a minimum of Rs. 5000 ( Rs. 10000 per bond certificate ).  There is no upper limit on investment.

Interest Rate

Interest Rate payable is 7.36% p.a. for the 10 year option, 
7.53% p.a. for the 15 year option and 7.62% for the 20 year option for retail investors for investment less than or equal to Rs. 10 lakh.
interest rates would be lower by 0.25%  for non retail investors in each of the tenure options.

Interest Payment Option

Interest will be paid annually

Tax Treatment

Interest income received by these bonds is tax free. There is no TDS.
But there is no tax saving benefits ( e.g. investment in PPF will give an individual tax exemption under Section 80 C) by investing in these bonds.

How to Apply

A retail  investor can only invest via a demat account. The bonds will be alloted in dematerialised form  and there will be no physical bond certificates at the time of allotment.  Later the investor will have the option to rematerialise  the bond certificates if  he/ she wants the physical bond certificates.  

Allotment

Allotment is made on a first come first basis as per a pre-decided ratio. The bonds will get alloted and listed both on BSE and NSE within 12 working days from September 30, 2015. 

Lock In Period

There is no lock – in period as these will be listed. They can be traded on BSE  and NSE.

Other Features 

NRIs can invest in these bonds as long as they do not use the interest and maturity amounts outside India.
These bonds are redeemed by NTPC.
They cannot be converted to stock or shares.
If you sell them in secondary market within one year, you will nave to pay tax on short term capital gains as per the income tax slab that you fall under. If you sell after 1 year of holding , the sale proceeds will be considered as long term capital gains attracting a tax of 10.3%.

The issue size is Rs. 700 crore. The bonds are considered secured as some amount of fixed assets of
the company are held against the bonds. Three major credit rating agencies – CRISIL, ICRA and CARE
have assigned ‘AAA’ rating to the issue.
Here is the effective yield that would be earned by a retail investor

Bond Period
Interest Rate
Yield Earned by individual by 10%
Yield Earned by individual by 20%
Yield Earned by individual by 30%

10 Year Bond 
7.36%
8.21%
8.39%
8.49%
15 Year Bond
7.53%
9.27%
9.48%
9.60%
20 Year Bond
7.62%
10.65%
10.90%
11.03%

The bonds are highly rated by the credit rating agencies means your investment is safe. The interest earned is tax-free. Experts and analysts also feel that a rate cut is imminent considering inflation which means such investment products in the future will have lesser yield. The interest earned can be further invested which can add up to your wealth. The bonds can be traded in the market and if there is a rate cut, such securities issued in future will have lesser yield leading to more demand translating to higher market prices for these bonds. Therefore if you are considering long-term safe investment options, these bonds are a good option. On the other hand, NTPC is in the power sector where there are many political and social issues that can hamper growth. Though these bonds can be traded in the market, there are not too many buyers which makes it a relatively illiquid investment. It is a long-term investment and so you have to be sure that you do not need the money invested for a long time. You might want to compare these bonds with bonds available in the secondary market before making your investment decision. There might be value deals present. Though the bonds are rated high, rating cannot be the only criterion considered as rating might change at any point of time. Investing in other products such as equity mutual funds can give you higher returns if you are able to take the risk. 
Here is a comparison of NTPC Tax free bonds with other similar long-term investment products –

Features

PPF

Fixed Deposit(10 Years)

NTPC Tax Free Bonds


Interest Rate

Interest rate can change depending on the base rate. It can go higher or lower. Currently it is 8.7% p.a.
A fixed interest rate of 7.75% – 8% can be earned on deposits less than Rs. 5,00,00,000 fora tenure >=5 years
A fixed interest rate of 7.36% – 7.62% depending upon tenure.

Tax benefits

Tax benefit at the time of investment under section 80C and the maturity amount is redeemed.
TDS will be deducted by the bank. The interest income should be added to the total income and tax has to be paid as per the slab rate applicable.
Interest earned is tax free. There is no tax exemption on investment in these bonds.

Liquidity

Partial withdrawal subject to certain condition is possible after 7th year of investment.
FDs can be liquidated subject to certain conditions. The FD holder will usually have to pay a fee for premature withdrawal.
They can be traded in the secondary market. It is relatively liquid as there are few buyers for such products.

Risk

Low
Low
Low

*Interest rate of ICICI Bank/HDFC for fixed deposits < Rs. 1 crore for tenure of 5 years or more is considered 
We feel that if you are looking for a secure long-term investment product that can give modest returns that are tax-free, you should consider investing in NTPC bonds. It is more beneficial if you fall in the highest income tax slab. 

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