Tax-free bonds which are seen hitting the street in the financial year 2014-15 may not be able to get the same attention it had got when interest rates were higher. This is because the coupon rates on these bonds are expected to be much lower than what was offered earlier.
“Since interest rates cycle is heading down, the yields on these bonds may not be so high due to which though the bonds may still get subscribed, but the response may not be as good as it was in the past years. Investors may continue to have higher interest in equity investments,” said Arvind Konar, head of fixed income, Almondz Global Securities.
Last month the Budget had announced tax-free bonds for infrastructure projects. Tax free bonds are popular with high net worth individuals as the interest is tax free. If the holding period is more than one year, investors have to pay long capital gains taxed at 20% with indexation or 10% without indexation.
The bonds offer a high degree of safety as they are issued by top rated public sector companies. In the past, issuers such as Rural Electrification Corporation, Power Finance Corporation and National Highways Authority of India have hit the market with such bonds. Since the interest rates were higher at that time, these issues had got subscribed very fast.