NHAI (The National Highways Authority of India) is offering 10 and 15 yr redeemable secured debentures carrying an tax free interest rate of 8.2% and 8.3% respectively. It is open to general public and institutions as well as non resident Indians. The interest payout will come to you every year on 1st Oct. The issue is open from December 28, 2011 to January 11 2012. Minimum investment is Rs. 50,000/- and then in multiples of Rs. 1,000/-. It carries a AAA/Stable rating by CRISIL.

These bonds will not get any benefit of tax deduction u/s 80C or 80 CCF. These can be traded in stock exchanges. Hence, if you choose to sell them in the market, you will incur capital gains tax similar to other listed debt securities.If sold within one year of purchase, it will attract short-term capital gains tax. And if sold after a year, it will attract long term gains @ 10% without indexing the cost. But if held till maturity, there will be no tax liability.

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%.

However if you compare investing in NHAI bonds with Fixed Deposits, we recommend you go for FDs because of following reasons…

1) Interests from NHAI bonds will come to you every year and will not be reinvested back in the bonds. That means unless you are looking for periodic payout or would be very disciplined in investing back the annual payout in some other instruments, you will be loosing out the opportunity of compounding effect and reinvestment of interest amount.

2) Assuming, you are able to reinvest the interest amount from NHAI bonds back into some other instrument, with 7%-8% coupon, every year for 10 years, the net yield will still be less than investing in FDs with 9.25% taxable interest for the same period. The only exception is if you fall in the 10% tax bracket, you might gain investing in NHAI bonds rather than FDs.

So in nutshell, invest wisely and invest in NHAI bonds only if you fall in the tax bracket of 10%, or less or if you are sure that you will reinvest your money back into some other instrument.