The Rise of Tax Free Bonds, and its Impact on Indian Real Estate

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Among  Indian investors, tax-free bonds have been a major success with HNI buyers making significant investment into such bonds. These popular debt instruments offer two different streams of revenue, the coupon rate (The interest rate that the issuer should pay) & capital appreciation. On an annualized basis, such bonds offer a return up to 12-14% & hence are equivalent to top performing mid-cap & small cap bonds in terms of returns. These bonds are rated AAA & are mostly issued by government agencies & hence are generally risk free.

Often raised for a time of 10-15-20 years, such bonds also offer tremendous incentive to save on tax money. Suppose if someone invests INR 10 million with coupon rate of 7.5%, for a time of 10 years, one can easily save tax on a total gross return of INR 7.5 million, that is indeed a huge number (Even if we discount the time value of money over a period of 10 years, that should be substantial in this case).

Impact on Real Estate

In the FY 2015-16, the GOI has issued a total tax free bonds of INR 43,000 crore comprising of various infrastructure development projects such as, railways, road transport, rural development & much more.

Limited funding options in along with delay in approval has been inimical to Indian infrastructure development. The slew of bonds will play a crucial role in bridging the investment gap for modern Indian infrastructure. The tax-free bonds along with other government initiatives such as creation of investment fund, allowing foreign investors to participate in alternative investment funds & easing of banks’ lending policies for infrastructure projects- all in tandem will give further push to the Indian infrastructure.

An accelerated infrastructure growth will entail significant boost to the Indian real estate & housing industry, both directly & indirectly. The later will manifest through the increased economic activities emanating from infrastructure development, thereby creating more jobs & demand for quality real estate.

The more explicit direct impact will result into increased real estate activities in & around these infrastructure development activities. Infrastructure is one of the principal force that shapes up the real estate buying decision. Better, roads, power supply & connectivity are crucial drivers that influences home buying decision. Hence, a surge in infrastructure activities will naturally translate into heightened real estate transactions.

More Bonds Expected

Although tax free bonds have not been issued in the given FY, more such bonds might be issued in FY 2016-17. The tax-free bonds are notable for being sold out on day one itself. In the last financial year, such bonds were oversubscribed by around 3-4 times. For instance, take the case of HUDCO’s tax free bonds, that received a total subscription in tune of around INR 8,217 crores- 4.5 times higher than the initial value of INR 1788.5 crores.

In the times to come the government will give further push to such bonds. An expected lower interest rate in the time to may be an add-on to the demand dynamics. The demand is expected to be be driven by both institutional & retail investors.

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