NHAI Bonds for Tax Savings: Review, Analysis & Calculation for NHAI Bonds 2011-12

High on the heels of other government infrastructure companies issuing Long term infrastructure bonds offering tax benefits to investors, the National Highway Authority of India (NHAI) has come out with its own issue of Tax Saving Bonds to tap into the benefits of long term capital raising thereby offering investors another option for tax savings.
Let's see some basic details of these NHAI Tax Saving Bonds first:

Calculations for effective returns from NHAI Tax Saving Bonds

What is the actual instrument being offered in the name of NHAI Bonds for Tax Savings
The issue offered by NHAI are Tax Free Secured Redeemable Non Convertible Bonds in the nature of Debentures but offering tax benefits under section
10(15) (iv) (h) of the Income Tax Act, 1961.

What is the business and function of NHAI?
NHAI or National Highways Authority of India is an autonomous body under the minitry of Road Transport and Highway, Government of India which was operationalised in the year 1995. Primary functions are to survey, develop, maintain and manage the National Highways. It also builds offices or workshops, establish and maintain hotels, restaurants and rest rooms at or near the highways vested in or entrusted to it and similar functions associated with it.

What are the opening and closing dates for NHAI Bonds for Tax Savings
The NHAI Tax Saving Bond issue opens on 28 December 2011 and closes on 11 January 2012.

What are the tax benefits avaialble for investors in the NHAI Bonds for Tax Savings
The income earned as interest from the NHAI tax saving bonds is fully exempted from income tax.
No TDS will be deducted by the issuer while paying the interest.
There is no Wealth Tax levied on investment in Bond under section 2(ea) of the Wealth-tax Act, 1957

What is the issue size of NHAI Bonds for Tax Savings
The issue constitutes of Rs. 5000 Crores with an option of extending it to 10,000 Crores in case of over-subscription.

Are the NHAI Bonds for Tax Savings available only in demat form?
NHAI bonds will be available both in demat and physical form, so all kinds of investors can apply for these bonds irrespective of whether they have demat account or not.

What are the credit ratings assigned to NHAI Bonds for Tax Savings
CRISIL has awarded "CRISIL AAA/Stable" ,CARE has assigned "CARE AAA" and "Fitch AAA(ind) with stable outlook" by FITCH.
All these indicate good stable outlook.

Where will the NHAI Bonds for Tax Savings be listed?
The NHAI bonds will be listed both on BSE and NSE.

What are the other options available for tax savings to investors other than NHAI Bonds for Tax Savings
The investors can invest in Long Term Infrastructure bonds which are currently open:
1) IDFC Infrastructure Bonds for Tax Saving
2) L&T Infra Bonds for Tax Saving
3) IFCI Infra Bonds for Tax Saving

What are the investment details about NHAI Bonds for Tax Savings?
Each NHAI Bond will cost Rs. 10,000 and that is also the minimum amount to be invested.
NHAI Bonds have a maturity period of 10 and 15 years and interest will be paid annually.
The coupon rate on the bond 8.20% for 10 years and 8.30% for 15 years.
For individuals in the highest tax bracket of 30.9%, the 10-year 8.2% tax-free bond gives an effective return of about 11.87%, and the 15-year 8.3% bond 12.01%.

How can one apply for NHAI Tax saving bonds?
Interested investors can apply through the paper based applications available at the branches of Union Bank of India, IDBI Bank and Selected Branches of other Bank.
Also, trading sites like icicidirect.com are offering online applications for these NHAI bonds.

Final Thoughts about NHAI Bonds for Tax Savings?
NHAI is backed by the government. Hence, the the stability and credit of these bonds can be considered to be stable.
Although the coupon rate of 8.2% and 8.3% may look a bit on the lower side as compared to the high coupon rates offered by other Long term infrastructuer bonds, one also needs to account for the tax free interest income - Interest earned on Long term infrastructure bond is NOT tax free, while the interest earned on these NHAI bonds is tax free. Taking into account the tax benefit of non-taxable interest payment, the effective coupon rate will increase.
Investors looking for tax savings options with shorter maturity can apply for these NHAI bonds