Comeback kings: Arun Jaitley ushers in tax-free infra bonds again

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Published: March 1, 2015 12:53:34 AM

Bond-market experts expect the issuance limit to be in the range of R50,000-70,000 crore this time

Tax-free infrastructure bonds have made a comeback in the 2015-16 Budget after a year’s absence. This time around, these bonds can be floated for projects in sectors such as roads, railways and irrigation.

The National Highways Authority of India (NHAI) and the Indian Railway Finance Corporation (IRFC) are some of the state-owned companies likely to benefit from this announcement.

Bond-market experts expect the issuance limit to be in the range of R50,000-70,000 crore this time.

The government has also proposed the setting up of a Public Debt Management Agency (PDMA), which would bring both external and domestic borrowings under one roof. This will help streamline and consolidate the bond market, say experts. “The primary task of PDMA would be to review the best practices of debt management followed internationally,” said Ashish Jalan, assistant vice-president, fixed income, SPA Securities.


Tax-free bonds, with a limit of R30,000 crore, were introduced in 2011-12 to boost infrastructure spending. Select state-owned entities, including Rural Electrification Corporation (REC) and Power Finance Corporation (PFC), were allowed to issue these bonds.

“These bonds are a big positive for the market. Last year, investors were disappointed as there was no allocation to tax-free bonds. The re-introduction of this category will help boost sectors that need long-term funding,” said Ajay Manglunia, senior vice-president-fixed income, Edelweiss Securities.

In 2012-13, the limit was doubled to R60,000 crore. However, state-owned entities issued bonds worth R18,000 crore, way below the target. In the next financial year, the limit was brought down to R50,000 crore against which companies borrowed R49,200 crore.

There is also a proposal to extend the period of applicability of the reduced rate of tax at 5% in respect of foreign investors (FIIs) and (QFIs) from corporate bonds and government securities from May 31, 2015, to June 30, 2017. In 2013, the government had cut the witholding tax on interest payments to 5% from 20%.

The government is also looking to bring out a sovereign gold bond that will act as an alternative to purchasing physical gold. This is aimed at bringing down the demand for the metal and, eventually, imports, which will help reduce the current account deficit.

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