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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Income tax Section 80CCF - A Tax saving Scheme that has Buyback Option IDFC Infra Bonds

IDFC has come out with a public issue of long-term infrastructure bonds in the form of secured redeemable non-convertible debentures. Investments of up to . 20,000 in these infrastructure bonds are eligible for tax exemption under section 80CCF. This is in addition to the . 1 lakh limit available under Section 80C, 80CCC and section 80CCD of the Income-Tax Act. The issue is currently open and will close for subscription on December 16.
The bonds on offer have two investment options. While series 1 carries a 9% coupon, payable annually, series 2 is a cumulative option where 9% will be paid compounded annually. The face value of each bond is . 5,000 and one can apply for a minimum of two bonds. The bonds have a lock-in period of five years. At the end of five years, you can sell the bonds on NSE. Also, there is a buyback facility available. Investors can subscribe to these bonds in either the physical form or in demat form.  
An investment of . 20,000 would fetch a tax exemption of . 2,060 if your tax rate is 10.3%, . 4,120 (if your tax rate is 20.6%) and . 6,180 (if your tax rate is 30.9%).
These bonds have got the highest credit rating of AAA from both ICRA and Fitch. The investment limit of . 20,000 per annum for tax benefits in these bonds is in addition to that available under Section 80C, 80CCC and 80CCD.
You can't exit these bonds before five years because of the mandatory lock-in period.

 

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Download Section 80CCF Tax Saving IDFC Infrastructure Bonds Application Form

https://sites.google.com/site/infrabondapplications/home/IDFC-Infrastructure-Bond-Application-Forms

Download Section 80CCF Tax Saving L&T Infrastructure Bonds Application Form

https://sites.google.com/site/infrabondapplications/home/l-t-long-term-infrastructure-bond-for-year-2011---2012

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