Tuesday, February 14, 2012
by
Indian Real Estate News
Infra bonds can save up to Rs 6,180, If you are in 30% tax bracket
Infrastructure bonds are making a splash these days just in time before the end of the tax saving season in March. Currently, issues are open for subscription from
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Infrastructure Finance Corporation of India (IFCI),
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Rural Electrification Corporation (REC),
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PTC India Financial Services and
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SREI Infrastructure Finance.
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L&T Infrastructure Finance
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IDFC Infra Bonds
IDFC has already raised . 533 crore through its issue of infrastructure bonds which closed for subscription in December 2011. The company is likely to come up with its next tranche of these bonds soon. You can invest up to . 20,000 in these bonds and claim tax deduction under Section 80CCF. If you are in the highest tax bracket, you can save as much as . 6,180 by investing in these bonds. The . 20,000 limit for investment in infrastructure bonds is in addition to the . 1 lakh tax deduction limit available under Section 80C and hence merits investment. You can choose an issuer of these bonds based on the credit rating, interest rates offered and the financial credentials of the company.
The Common Elements
All issues have tenures of 10 years and 15 years. There is a buyback option at the end of five years from the date of allotment, and liquidity will also be offered by listing the bonds on the stock exchange once the mandatory lock-in period of 5 years is over. While the buy-back facility for the 10-year bonds is after 5 years, for the 15-year option it comes after 7 years. All of them provide annual and cumulative options of interest payment for both maturity tenors. You can choose to apply for only the 10- year bonds or only the 15-year bonds or a combination of the two. If you have a demat account you can apply in the demat mode, else you can even opt for physical certificates. If you are applying in the demat mode, you need to provide details of your demat account along with a copy of your Permanent Account Number (PAN) card, along with a cheque. However, if you are looking to invest in physical form, you need to attach a copy of your residence proof as well. The face value of each bond is . 5,000 and one has to make an application of one bond and in multiples of one bond thereafter. There is no upper limit on the amount you can invest. Only in the case of SREI Infra, the face value is . 1,000 and one can apply for a minimum of one bond.
Choosing One Over Other
The issues on offer differ in interest rates, ratings and buy-back options after the lock-in period. IFCI pays the highest interest amongst all of them. For a 10 year period, IFCI pays 9.09% while, REC pays 8.95%, PTC India Financial pays 8.93% and SREI Infra Finance pays 8.9%. For the 15 year tenure, IFCI pays 9.16% while all others pay 9.15%. While REC and IFCI are owned by the government, PTC India Financial Services parent namely PTC, is a government promoted public private partnership and SREI Infra is a private player.
In terms of ratings, REC scores as it has an AAA rating which indicates highest degree of safety in terms of timely repayment of principal and interest. As compared to this, IFCI, PTC India Financial Services and SREI Infra have a lower rating.
IFCI bonds enjoy a "BWR AA-" by Brickwork Ratings, "CARE A+" by CARE and "LA" by Icra. PTC India Financial Services has been assigned an A+ rating by CARE and ICRA. SREI infra bonds enjoy a rating of CARE AA. Since REC and IFCI are owned by the government, the margin of safety is high. Investors could choose from either of the two. For those who are ready to split the amount in two issues, there is another strategy. If you want the best of high rates as well as high rating, invest . 10,000 in the 10-year option of IFCI at 9.09%, and . 10,000 in the 15-year option of REC at 9.15%. With this strategy you get the highest rates awell as highest safety. However, not all financial planners would advise you to split investments since the amount of . 20,000 is small and would make it difficult to track over a 5-year period. If you are the one who prefers simplicity, restrict yourself to one issuer and invest the entire . 20,000 there. Finally, even if you are short of funds and cannot invest right now, do not lose hope. There will be multiple issues right till the end of the financial year and you can invest in any of them when you have liquidity.
Many investors do feel that it is a tedious process to invest in these bonds. One, the amount is too small and they are locked in for a period of 5 years. Over a period of five years, you may have multiple series of bonds from multiple issuers which would make tracking difficult. However, investment experts feel this could mean you end up losing an option to save . 6,180 in taxes every year, assuming you are in the highest tax bracket.
Infrastructure bonds are the only products available under Section 80CCF and hence investors would do well to take advantage of this and save tax. However, experts advise against investing more than . 20,000, as the interest income here is taxable. So if you are in the highest tax bracket, a return of 9% would translate into a post-tax return of 6.24%. As against this, tax-free bonds from public sector units like NHAI and PFC on offer would give you 8.3%. If your income is not taxable, bank FDs may offer you slightly higher returns, and with better liquidity.
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