Guest Post: The National Highways Authority of India (NHAI) Tax Free Bond Issue — Should You Invest?

by Vinaya HS on January 2, 2012

in Finance

Thanks for visiting Capital Advisor. I frequently update this blog to cover various topics on personal finance such as investment strategies, financial products that you should buy and ones that you really should stay away from, financial calculators, emerging themes such as early retirement and financial independence, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

The following is a guest post from reader Nikhil Shah and deals with the intricacies of investing in the soon to close investment opportunity in NHAI’s Tax Free Bond Issue along with the income tax angle. Nikhil’s analysis also contains a very interesting perspective on how you can plan for major financial goals through this investment route. A couple of weeks back, Nikhil had also put-up a detailed analysis of L&T’s Infrastructure Bond issue.

The Central Board for Direct Taxes (CBDT) has allowed four firms to raise up to Rs 30,000 crore through the issue of Tax Free Bonds in FY 2011-2012. The National Highways Authority of India (NHAI; an autonomous authority of the Govt. of India under the Ministry of Road Transport and Highways (MoRTH) constituted on Jun 15, 1985) and the Indian Railway Finance Corporation (IRFC) have each been allowed to raise up to Rs 10,000 crore. The Housing and Urban Development Corporation (HUDCO) and Power Finance Corporation (PFC) are allowed to raise up to Rs 5,000 crore each. Tax free bonds means that the interest earned from these bonds is exempt from income tax and is therefore not considered while computing one’s total income.

The Rs 10,000 crore National Highways Authority of India bond offering which opened for subscription on December 28, 2011 offers a good opportunity for investors to lock-in funds at higher yields and earn tax-free interest income.

40% of the Rs 10,000 crore issue is earmarked for institutional investors while another 30% is earmarked for retail investors and high net worth individuals. The bonds will have differential coupon rates of 8.2% for 10-years and 8.3% for 15-years. The NHAI issue presents a good opportunity for investors to lock money in “AAA”-rated sovereign-like bonds at higher yields. Apart from high coupon rates and safety, these bonds will be very liquid because of the large float. Investors will easily be able to buy and sell these bonds on the exchange.

An 8% tax-free coupon rate is very much comparable to an investment product that delivers 12% pre-tax returns. This issuance is even better than bank fixed deposits which are currently giving about 9% pre-tax returns. Also, with interest rates expected to slide over the next few months, these bonds can generate higher returns by giving you an option to sell these bonds at a relatively higher coupon rate.

I’ve prepared detailed calculations and analysis which you can download from the link below:

Click here to download calculations and analysis for the NHAI Tax Free Bond Issue (courtesy Nikhil Shah).

There are six sheets containing the following information:

  • Sheet #1 shows Present Value to Future Value computations.

  • Sheet #2 shows computation of pre-tax yield for Individuals & HUF and also for Banks & Corporates.

  • Sheet #3 shows some useful calculations and tools.

  • Sheet #4 shows how much to invest to get desired amount.

  • Sheet #5 shows Child Education Expenses Planning via Tax Free Bonds

  • Sheet #6 shows Retirement Expenses Planning via Tax Free Bonds.

For additional information about this bond issue, please download the FAQ from the link below:

Click here to download FAQs for the NHAI Tax Free Bond Issue (courtesy Nikhil Shah).

Disclaimer [from Nikhil]:

All views and opinions are my own and have no relation whatsoever with any person or firm. The information provided is just for guidance. It may not be absolutely or technically correct. The information could easily be dated. Always check with Fund Company/Brokerage/Financial Advisor/other relevant institution for the correct information. Information provided on this Blog/Web Site is for informational purpose only. It is the reader’s responsibility to ascertain the facts, conditions and risk factors. All investments are subject to market risks. Read all scheme related documents carefully before investing. You are advised to consult your financial advisor before taking any investment decision. Read the prospectus before investing in these bonds.

Thanks for reading this article. I'd love to hear your opinion. Please use the comments section below to share your thoughts. I frequently write new articles that also cover several other aspects of personal finance including credit cards, financial goals, health insurance, income tax, life insurance, mutual funds, retirement planning, and much more. You can Subscribe through Email and receive new articles directly in your Inbox or you can Subscribe through the RSS Feed and receive new articles in your feed reader.

{ 6 comments… read them below or add one }

Sam January 6, 2012 at 3:21 AM

Vinaya- I looked at the calculation sheet and will Nikhil or you will be able to share the spreadsheet for us put in our desired amount and look at the end result?

Vinaya HS January 6, 2012 at 7:09 AM


Will check with Nikhil if he can share the worksheets.

Nikhil Shah January 6, 2012 at 12:21 PM

Dear Sam,

Sorry , I am unable share the spreadsheet.

if you have any query , send me the e-mail : , i will try to solve your problem.


Nikhil Shah

Srikanth January 17, 2012 at 11:17 AM

Hi Nikhil/Vinaya:
A couple of questions:
1. In terms of tax-free interest for NHAI bonds, the entire interest earned is tax-exempt, right? In comparison, the L&T Infra bonds earn tax exemption only up to one Lakh?, correct?

2. The interest is credited to your account annually which you are free to invest. Therefore, you have chances of compounding and apply the rule of 72, correct?


Nikhil Shah January 17, 2012 at 1:52 PM

Hi Srikanth ,

( 1 ). Interest Earned From NHAI Bonds is Totally Tax Free Interest. In L&T Infra Bonds (u/s.80 CCF Of IT Act ) exemption limit of only to Rs.20,000/-

(2). Yes are free to invest, the Interest annually recd from NHAI Tax Free bonds.


Nikhil Shah

Amit Surpuriya January 20, 2012 at 2:14 PM


Mutual Fund | Infrastructure Bond | 54EC Capital Gain Bond | Tax Free Bonds | Debenture | Mediclaim | Company Fixed Deposit | Systematic Investment Plan | Tax Planning

Previous post:

Next post: