Long term Infra bonds are good to get extra tax break, but not beyond that…..

INVESTING in the equity markets is not an attractive option anymore for the average investor or even the biggest investors, who are failing to predict the way the market will move. Thankfully, there are a number of investment options that are available now, promising attractive returns for retail investors. There are two infrastructure bond issues that are open for investment at present, a non-convertible debenture (NCD) issue, which will be available for investment soon, and a number of interesting corporate fixed deposit schemes that one can choose from.

For an investor wanting to invest a sum of, say Rs 100,000 today, what would an investment in any of these instruments fetch in terms of returns. An analysis: Tax-saving infra bonds: The bond issues of L&T Infrastructure Finance are open now for investors and offers an interest rate of 9 per cent. Both bonds come with a 10-year tenure and a lock-in period of five years after which the bonds could be traded on the stock exchanges. But why should one go for an infra bond offering 9 per cent returns, when there are many banks that offer 10 per cent interest rate on fixed deposits?

These tax saving infrastructure bonds also help the investor claim a tax exemption of Rs 2,060-6,180, depending on the tax slab of the investor. 

Shortcomings: The tax benefit can be availed only for the first year of investment, despite the scheme having a minimum lock-in period of five years. Additionally, the tax benefit is available only up to an investment of Rs 20,000. Any investment above that would still fetch the same level of income tax For those in the 30 per cent tax bracket and have already exhausted the limit of Rs 100,000 under section 80C, it makes sense to invest Rs 20,000 in these bonds because it would result in savings of Rs 6,000.

Non-convertible debenture (NCD) issues

Many non-banking financial companies (NBFCs) like Muthoot Finance, Manappuram Finance and Shriram Transport Finance raised funds through NCD issues recently, offering attractive interest rates of 11.50-12 per cent. Muthooot Finance plans to soon hit the market with another round of NCD issue with an interest of more than 12 per cent and many NBFCs are also expected to follow.

Shortcomings: Though the returns are attractive, there is no tax benefit from investing in an NCD issue. Financial planners also advise investors to check the credentials of the companies and the ratings given by rating agencies for the issue, to ensure that the investment is safe.

Corporate fixed deposits
While banks offer interest rates of 9-10.50 per cent on fixed deposits, NBFCs and companies offer fixed deposit schemes with much higher interest rates. For in stance, Mahindra Finance promises an interest of 12.21 per cent (12.58 per cent for senior citizens) on fixed deposits with a five-year tenure.

Shortcomings: Fixed deposits, too, have no tax benefits. The investor should check the rating of the issue and study the past history of the company to ensure that the investment is safe, experts say.

Public Provident Fund (PPF)
After the maximum investment amount has been raised to Rs 100,000 and a higher post-tax returns of 8.6 per cent, PPF has become very attractive.

Being a government controlled instrument, it is absolutely secure.
The investments made in PPF are eligible for tax deduction under section 80C of an individual income tax return.

Shortcoming: PPFs have a minimum lock in period of 15 years. These are ideal instruments for a long-term investor.

Application form for Applying for Tax Saving Long Term Infrastructure Bond  

Current open Long Term Infra Bond Application form

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