Effective Yield on Tax free Return

Sub – section (7) of Section 186 of the Companies Act 2013 discussed earlier here, no loan shall be given under this section at a rate of interest lower than the prevailing yield of one year, three-year, five-year or ten-year Government Security closest to the tenor of the loan.

Rate of interest here directly linked to yield of government securities here. A tax-free bond gives higher yield compare to taxable bond at similar rate of interest.

Ministry of Corporate Affairs has issued clarification on rate of interest of tax-free bonds through its General circular 06 of 2015 dated 9^th April 2015.

In cases where the effective yield (effective rate of return) on tax-free bonds is greater than the prevailing yield of one year, three-year, five-year or ten-year Government Security closest to the tenor of the loan, there is no violation of sub-section (7) of section 186 of the Companies Act, 2013.

Even though present circular refer to General Circular 06 of 2013 dated 14^th March 2013, this serve only academic interest only.

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