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

Submit filled up application    Collection canter near you

   

IDFC Section 80CCF Tax Saving Infrastructure Bonds

IDFC has launched their Section 80CCF infrastructure bonds, and these come with a slightly higher interest rate than the other bonds that have been released so far.

They carry a 9% annual interest rate, and IDFC has simplified the issue a little bit by having the option with only one maturity – that of ten years.

Like, the other 80CCF bonds, these will have the the annual interest payment or the cumulative option, and a buyback option after 5 years. 

The issue opens on November 21, 2011 and closes on December 16, 2011. In the past they have appeared on online platforms like ICICI Direct and Edelweiss, so that's one way to buy them, or as Austere suggested you can print the forms online and submit it in one of the collection centers.

Here are some other details about the bonds:

Series	1	2
Interest Rate	9%	Cumulative but effectively 9%
Maturity Period	10 years	10 years
Buyback Option	5 years	5 years
Buyback Amount	5,000	7,695
Maturity Amount	5,000	11,840

After the lock in period of 5 years, the bond will list on the NSE and BSE.

For whatever it's worth the issue is rated highly by ICRA and Fitch – both of them rated the issue AAA. To me, it doesn't make a lot of sense to apply anything more than Rs. 20,000 and that too only on one of these 80CCF bonds, so if you have applied for something already then you are better off investing your money in any other bank fixed deposit which doesn't have any lock in period and will have a slightly higher interest rate also.

A new question that I see appear a few times with respect to these bonds is if you need to buy it every year to get the tax benefit. I think the source of that question is the confusion between the tax benefit.

Please be cognizant of the fact that the interest is not tax free. The interest will be taxable every year, but the way you get the tax benefit is that the value of bonds that you buy gets reduced from your taxable salary, and that means you have to pay less tax.

The other question that I saw today was would you have to pay tax if you exercised the buyback and the answer to that is that buyback doesn't affect how the bond is taxed.

If you took the annual interest option then the interest will be taxed every year, and if you took the cumulative option then you will be taxed capital gains. The face value of the bond will not be taxed.

 

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You can download the Infrastructure Bond applications below: 



https://sites.google.com/site/infrabondapplications/