Salient Features of Tax Free Bonds Proposed to be issued by Indian Railway Finance Corporation Limited
Indian Railway Finance Corporation Ltd. (IRFC) is a dedicated financing arm of the Ministry of Railways. Its sole objective is to raise money from the market to part finance the plan outlay of Indian Railways. The money so made available is used for acquisition of rolling stock assets and for meeting other developmental needs of the Indian Railways. The company has proposed to issue Tax Free Bonds and submitted Draft Shelf Prospectus (Dated January 10, 2012).
HIGHLIGHTS OF TAX BENEFITS
- The income by way of interest on these Bonds is fully exempt from Income Tax and shall not form part of Total Income as per provisions under section 10 (15) (iv) (h) of IT Act.
- There will be no deduction of tax at source from the interest, which accrues to the bondholders on these bonds irrespective of the amount of the interest or the status of the investors.
- Wealth Tax is not levied on investment in Bonds under section 2(ea) of the Wealth-tax Act, 1957.
Latest Update – Issue is finally approved and will open 27 Jan 2012. For more details please refer the following post:-
Under the current tax laws, the following possible tax benefits, inter alia, will be available to the Bond Holder. This is not a complete analysis or listing of all potential tax consequences of the subscription, ownership and disposal of the Bond, under the current tax laws presently in force in India. The benefits are given as per the prevailing tax laws and may vary from time to time in accordance with amendments to the law or enactments thereto. The Bond Holder is advised to consider in his own case the tax implications in respect of subscription to the Bond after consulting his tax advisor as alternate views are possible interpretation of provisions where under the contents of his statement of tax benefit is formulated may be considered differently by income tax authority, government, tribunals or court. We are not liable to the Bond Holder in any manner for placing reliance upon the contents of this statement of tax benefits.
A. INCOME TAX
1. Interest from Bond do not form part of Total Income.
a) In exercise of power conferred by item (h) of sub clause (iv) of clause (15) of Section 10 of the Income Tax Act, 1961 the Central Government vide notification no 52/2011.F.No. 178/56/2011-(ITA-1) dated 23rd September 2011 authorizes our Company to issue during the Financial year 2011-12, tax free, secured, redeemable, non-convertible bonds of rupee 1,000 each in case of public issue for the aggregate amount of Rs. 10,00,000 lakhs subject to the other following conditions that –
i) It shall be mandatory for the subscribers of such bonds to furnish their permanent account number to the issuer.
ii) The holder of such bonds must register his or her name and holding with the issuer.
iii) The tenure of the bonds shall be ten or fifteen years.
iv) The interest on the bonds shall be not less than hundred basis points lower than the yield on Government Securities of equivalent residual maturity as reported by the Fixed Income Money Market and Derivative Association of India, as on the last working day of the month immediately preceding the month of the issue of the bonds but in the case of a Public issue, the interest on the bonds shall be not less than 50 basis points lower than the yield on Government Securities of equivalent residual maturity.
v) The commission on sale shall be capped at a maximum of a flat fee of 1.25% of the issue size;
b) Section 10(15)(iv)(h) to be read with Section 14A(1) provides that in computing the total income of a previous year of any person, interest payable by any public sector company in respect of such bonds or debentures and subject to such conditions, including the condition that the holder of such bonds or debentures registers his name and the holding with that company, as the Central Government may, by notification in the Official Gazette, specify in this behalf shall not be included;
Section 2(36A) of the IT Act defines —Public Sector Companyll as any corporation established by or under any state Central, State, Provincial Act or a Government company as defined section 617 of the companies Act, 1956.
c) Accordingly, pursuant to the aforesaid notification, interest from bond will be exempt from income tax.
d) Since the interest Income on these bonds is exempt, no Tax Deduction at Source is required.
e) Under section 195 of the Income Tax Act, Income Tax shall be deducted from sum payable to non residents on the long term capital gain and short term capital gain arising on sale and purchase of bonds at the rate specified in the Finance Act of the relevant year or the rate or rates of the income tax specified in an agreement entered into by the Central Government under section 90, or an agreement notified by the Central Government under section 90A, as the case may be.
However under section 196D, No deduction of tax shall be made from income arising by way of capital gain to Foreign Institutional Investors.
2. CAPITAL GAIN
a) Under section 2 (29A) of the I.T. Act, read with section 2 (42A) of the I.T. Act, a listed Bond is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer.
Under section 112 of the I.T. Act, capital gains arising on the transfer of long term capital assets being listed securities are subject to tax at the rate of 20% of capital gains calculated after reducing indexed cost of acquisition or 10% of capital gains without indexation of the cost of acquisition. The capital gains will be computed by deducting expenditure incurred in connection with such transfer and cost of acquisition/indexed cost of acquisition of the bonds from the sale consideration.
However as per third proviso to section 48 of Income tax act, 1961, benefits of indexation of cost of acquisition under second proviso of section 48 of Income tax Act, 1961 is not available in case of bonds and debenture, except capital indexed bonds. Thus, long term capital gain tax can be considered 10% on listed bonds without indexation.
Securities Transaction Tax (“STT”) is a tax being levied on all transactions in specified securities done on the stock exchanges at rates prescribed by the Central Government from time to time. STT is not applicable on transactions in the Bonds.
In case of an individual or HUF, being a resident, where the total income as reduced by the long term capital gains is below the maximum amount not chargeable to tax i.e. Rs. 180,000 in case of all individuals, Rs. 190,000 in case of resident women, Rs. 250,000 in case of resident senior citizens and Rs. 500,000 in case of resident very senior citizens, the long term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of ten per cent in accordance with and the proviso to sub-section (1) of section 112 of the I.T. Act read with CBDT Circular 721 dated September 13, 1995.
A 2% education cess and 1% secondary and higher education cess on the total income tax (including surcharge for corporate only) is payable by all categories of tax payers.
b) Short-term capital gains on the transfer of listed bonds, where bonds are held for a period of not more than 12 months would be taxed at the normal rates of tax in accordance with and subject to the provision of the I.T. Act.
The provisions related to minimum amount not chargeable to tax, surcharge and education cess described at para 2 (a) above would also apply to such short-term capital gains.
c) As per the provisions of section 54F of the Income Tax Act, 1961 and subject to conditions specified therein, any long-term capital gains (not being residential house) arising to Bond Holder who is an individual or Hindu Undivided Family, are exempt from capital gains tax if the entire net sales considerations is utilized, within a period of one year before, or two years after the date of transfer, in purchase of a new residential house, or for construction of residential house within three years from the date of transfer. If part of such net sales consideration is invested within the prescribed period in a residential house, then such gains would be chargeable to tax on a proportionate basis.
Provided that the said Bond Holder should not own more than one residential house at the time of such transfer. If the residential house in which the investment has been made is transferred within a period of three years from the date of its purchase or construction, the amount of capital gains tax exempted earlier would become chargeable to tax as long term capital gains in the year in which such residential house is transferred. Similarly, if the Bond Holder purchases within a period of two years or constructs within a period of three years after the date of transfer of capital asset, another residential house (other than the new residential house referred above), then the original exemption will be taxed as capital gains in the year in which the additional residential house is acquired.
d) The income by way of short term capital gains or long term capital gains (not covered under Section 10 (38) of the IT Act) realized by FIIs on sale of security in the Company would be taxed at the following rates as per Section 115AD of the I.T. Act.
- Short term capital gains- 30% (plus applicable surcharge and education cess).
- Long term capital gains – 10% without cost indexation (plus applicable surcharge and education cess)
As per section 90(2) of the IT Act, the provision of the IT Act would not prevail over the provision of the tax treaty applicable to the non-resident to the extent such tax treaty provisions are more beneficial to the non resident. Thus, a non resident can opt to be governed by the beneficial provisions of an applicable tax treaty
3. Profit and loss
In case the Bonds are held as stock in trade, the income on transfer of bonds would be taxed as business income or loss in accordance with and subject to the provisions of the I.T. Act.
4. Taxation on gift
As per section 56(2)(vii) of the I.T. Act, in case where individual or Hindu undivided Family receives bond from any person on or after 1st October, 2009
A. without any consideration, aggregate fair market value of which exceeds fifty thousand rupees, then the whole of the aggregate fair market value of such bonds/debentures or;
B. for a consideration which is less than the aggregate fair market value of the Bond by an amount exceeding fifty thousand rupees, then the aggregate fair market value of such property as exceeds such consideration;
shall be taxable as the income of the recipient.
Provided further that this clause shall not apply to any sum of money or any property received—
(a) from any relative; or
(b) on the occasion of the marriage of the individual; or
(c) under a will or by way of inheritance; or
(d) in contemplation of death of the payer or donor, as the case may be; or
(e) from any local authority as defined in the Explanation to clause (20) of section 10; or
(f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23 C) of section 10; or
(g) from any trust or institution registered under section 12AA.
B. WEALTH TAX
Wealth-tax is not levied on investment in bond under section 2(ea) of the Wealth-tax Act, 1957.
C. Proposals made in Direct Taxes Code
The Hon’ble Finance Minister has presented the Direct Tax Code Bill, 2010 (“DTC Bill”) on August 30, 2010, which is proposed to be effective from April 1, 2012. The DTC Bill is likely to be presented before the Indian Parliament thereafter. Accordingly, it is currently unclear what effect the Direct Tax Code would have on the investors.
- Financing arm of the Indian Railways
- Notified as a Public Financial Institution under Section 4A of the Companies Act, 1956
- Registered as a NBFC-ND-IFC (Infrastructure Finance Company) with Reserve Bank of India
- 100% shareholding held by Government of India
- Consistently profit making Public Sector Undertaking
- Consistently rated ‘AAA’ by CRISIL, ICRA and CARE
- Impeccable track record of funding rolling stock asset creation worth Rs. 60,163 crore (5,060 locomotives, 32,115 passenger coaches and 1,39,659 freight cars) for Indian Railways so far, besides providing funding support of Rs. 2,294 crore to other Railway entities such as Rail Vikas Nigam Ltd., Rail Tel Corporation of India Ltd. Etc
- Networth as on September 30, 2011 is Rs 4487.49 crores
- Net Profit after Tax as on September 30, 2011 is 201.52 crores and it stood at Rs.485.20 crores for year ended March 31, 2011 compared to Rs 442.69 crore in March 31, 2010.
- The Company shall issue Bonds upto an aggregate amount of Rs 6,300 crores in one or more tranche(s), on or prior to March 31, 2012 pursuant to CBDT’s Notification dated September 23, 2011 which authorised the Company to raise tax free bonds aggregating up to Rs 10,000 crores in the financial year 2011-12.
- Credit Ratings of “CRISIL AAA/Stable” by CRISIL, “CARE AAA” by CARE and “ICRA AAA by ICRA indicating Highest Degree of Safety in terms of timely servicing of financial obligations.
- Bonds to be allotted on first-cum-first serve basis up to the limit reserved for each category of investors
- Bonds can be held in physical or in dematerialized form, at the option of bondholders
- Bonds are proposed to be listed on the BSE and the NSE
The Gol, by virtue of power conferred upon it under Section 10(15)(iv)(h) of the Income Tax Act, 1961, has issued Notification No. 52/201 1.F.No.l78/56/2011-(ITA.l) dated September 23, 2011 authorising the Company to issue the said Bonds upto an aggregate amount of Rs. 10,00,000 lakhs during the financial year 2011 -12.
The Company has already raised secured tax free, redeemable, non-cumulative, non-convertible bonds through private placement route, aggregating Rs. 73,111 lakhs. The deemed date of allotment was November 8, 2011 and the date of refund was December 1, 2011. The listing and trading in these bonds have commenced on NSE and BSE from December 11, 2011 and December 8, 2011 respectively. Hence, the Company shall issue the Bonds upto an aggregate amount of Rs. 6,30,000 lakhs through this Issue during the financial year 2011-12 out of the total permissible amount of Rs. 10,00,000 lakhs, as approved by its Board through its resolution dated January 10, 2012.
The following are the key terms of the Bonds. This section should be read in conjunction with, and is qualified in its entirety by, more detailed information in the section titled “Terms of the Issue” on page 104.
The key common terms and conditions of the Bonds are as follows:
Terms and conditions
|Minimum Application Size||The minimum number of Bonds per application form will be calculated on the basis of the total number of Bonds applied for under each such Application Form and not on the basis of any specific option|
|Mode of allotment||Both in dematerialised form as well as in physical form, at the option of the Applicants|
|Terms of Payment||Full amount on application|
|Trading Lot||1 (one) Bond|
|Who can Apply||Category I:
Act, Statutory Corporations, Commercial Banks, Co-operative Banks and
Regional Rural Banks, which are authorised to invest in the Bonds;
Fund, which are authorised to invest in the Bonds;
|The following investors applying for an amount aggregating to above Rs. 5 lakhs across all Series in each tranche|
|The following investors applying for an amount aggregating to upto and including Rs. 5 lakhs across all Series in each tranche|
Participation by any of the above-mentioned investor classes in this Issue will be subject to applicable statutory and/or regulatory requirements. Applicants are advised to ensure that applications made by them do not exceed the investment limits or maximum number of Bonds that can be held by them under applicable statutory and/or regulatory provisions.
In case of Application Form being submitted in joint names, the Applicants should ensure that the demat account is also held in the same joint names, and the names are in the same sequence in which they appear in the Application Form.
Applicants are advised to ensure that they have obtained the necessary statutory and/or regulatory permissions/consents/approvals in connection with applying for, subscribing to, or seeking allotment of Bonds pursuant to the Issue.
TERMS AND CONDITIONS IN CONNECTION WITH THE BONDS
Nature of the Bonds
The Bonds being issued are in form of tax free secured redeemable non-convertible bonds in the nature of debentures of face value of Rs. 1000 each, having tax benefits under Section 10(15)(iv)(h) of the Income Tax Act, 1961, as amended, aggregating upto Rs. 6,30,000 lakhs, to be issued by Company in terms of this Draft Shelf Prospectus and the respective Tranche Prospectus(es). The Bonds shall bear a fixed rate of interest, as set out in the respective Tranche Prospectus(es).
The terms of each Series of Bonds** are set out below:
Series of Bonds*
Tranche [.] Series [.]
Tranche [.] Series [.]
|**Tenor||10 Years||15 Years|
|Redemption Date||At the end of 10 Years from the Deemed Date of Allotment||At the end of 15 Years from the Deemed Date of Allotment|
|Redemption Amount (`/Bond)||Repayment of the Face Value plus any interest that may have accrued at the Redemption Date|
|Frequency of Interest Payment||As specified in the Tranche Prospectus for a particular Series of Bonds|
|Minimum Application Size||As specified in the Tranche Prospectus for a particular Series of Bonds|
|In Multiples of||As specified in the Tranche Prospectus for a particular Series of Bonds|
|Face Value (`/Bond)||Rs. 1,000|
|Issue Price (`/Bond)||Rs. 1,000|
|Mode of Interest Payment||Through various modes available*|
|Coupon Rate (%) p.a.||As specified in the Tranche Prospectus for a particular Series of Bonds|
|Annualized Yield||As specified in the Tranche Prospectus for a particular Series of Bonds|
|Nature of Indebtedness and Ranking||The claims of the Bondholders shall be superior to the claims of any unsecured creditors of the Company and subject to applicable statutory and/or regulatory requirements, rank pari passu inter se to the claims of creditors of the Company secured against charge on the movable assets comprising of rolling stock such as wagons, locomotives and coaches.|
|Credit Rating||CRISIL has reaffirmed the credit rating of “CRISIL AAA/Stable” (pronounced as “CRISIL Triple A with stable outlook”) forRs. 20,59,438 lakhs long term borrowing programme of the Company (“DebtProgramme”) vide its letter no. VR/FSR/IRFC/201 1-12/1208 dated December 14, 2011. Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.ICRA has reaffirmed the credit rating assigned of “[ICRA] AAA” (pronounced as “ICRA triple A”) for the Debt Programme of the Company vide its letter no. D/RAT/2011-2012/11/13 dated December 19, 2011. Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.CARE has reaffirmed the credit rating of “CARE AAA (pronounced as triple A)” for the Debt Programme of the Company vide its letter dated December 14, 2011. Instruments with this rating are considered to have the highest degree of safety regarding timely servicing of financial obligations. Such instruments carry lowest credit risk.Note: These credit ratings are not a recommendation to buy, sell or hold securities and investors should take their own decision. These ratings are subject to revision or withdrawal at any time by assigning rating agencies and should be evaluated independently of any other ratings. For the rationale for these ratings, see Annexure II of this Draft Shelf Prospectus.|
*Number of Series of Bonds will be decided at the Tranche Prospectus(es) stage
** Our Company shall allocate and allot Bond Series bearing longest maturity to all valid applications, wherein the Applicants have not indicated their choice of the relevant Bond Series.
Terms of Payment
The entire Face Value per Bond is payable on Application. In the event of Allotment of a lesser number of Bonds than applied for, the Company shall refund the amount paid on application to the Applicant, in accordance with the terms of the respective Tranche Prospectus.
Source: Draft Shelf Prospectus (Dated January 10, 2012)
FURTHER UPDATE – Issue is finally approved and will open 27 Jan 2012. For more details please refer the following post:-