Tax Saving Infra Bonds

Dec 5th, 2011No Comments

Salient Features of Tax-saving Infrastructure Bonds

-Infrastructure Bonds are issued at par with a mandatory 5-year lock-in

-These bonds usually have tenure of 10-15 years. However, there is a buy-back option after 5 years from the date of allotment,when the investor can redeem his investment

-They normally carry two options – annual interest and cumulative interest

-You can apply both in Demat or physical form

-To provide liquidity for investors who opt to invest for longer period, these bonds would be listed on the NSE/BSE after 5 years

-Only resident individuals and HUF are eligible to invest (minors and NRIs are not eligible)

-In case of joint application, only the first applicant can claim the tax benefit

Superior Returns

Your taxable income will be reduced to the extent you invest in these bonds subject to a limit of Rs.20,000. Thus you stand to save up to Rs.6180 if you fall in the 30% tax bracket; Rs.4120 for 20% tax bracket; and Rs.2060 for the 10% tax bracket.

The issues presently open are offering a return of 9% p.a. Accordingly, the effective return for the cumulative-interest bonds considering the tax benefit, works out to about 17.35% (for 30% tax slab), 14.15% (for 20% tax slab) and 11.40% (for 10% tax slab).These are excellent returns and hence it would definitely be worthwhile investing in these bonds.

Moreover at 9%, infrastructure bonds clearly offer better returns than some of the instruments u/s 80C such as NSC or the 5-yr Bank FD. Therefore, if you do not have sufficient funds and have to make a choice, it would be better to forgo the limit u/s 80C and instead invest u/s 80CCF.

Current Issues

At present two issues are open. Both are offering 9% p.a. returns. One is L&T’s issue which is rated AA+ by both CARE and ICRA and is open till Dec 24th. The other is IDFC’s issue which is rated AAA by ICRA and AAA (ind) by Fitch and is open till Dec 16th.

Go for it

The interest rates that can be offered on these bonds cannot be more than the yields prevailing on the relevant Govt. securities at the time of issue.  As the market interest rates have increased in the last few months, the present issues are offering about 0.25-0.5% more returns than the issues in the recent past.

However, it now seems that the interest rates may have peaked. Hence it is likely that the future issues may come at lower rates.Therefore, this appears to be a good time to make the investment. From this perspective, it may also be better to opt for the cumulative option as one may not get opportunities to re-invest the annual dividend at 9% across all 5 years if one were to go for the dividend option.

The amount being relatively small, it may be preferable to make the entire investment at one go (and with one issuer). This will make it easier to keep track of the investment. But if someone is not in a position to do, he/she can split the investment over the next 2-3 months.

Kevin Gala
Financial Planner

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