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IFCI Infrastructure bonds - Should you subscribe?

IFCI Long-Term Infrastructure Bonds

Infrastructure development is one of the key areas where India is still lacking, and is a driving quest for government over the past couple of years. Execution and funding for the same are the two areas where India is still not able to cope up. Even though the government can’t do much for the former, it is constantly watching the funding part.

In the Union Budget 2011-12, the government has allocated Rs 2140 billion for infrastructure development. It has also allowed additional tax free bonds of Rs 300 billion for the expansion of highways, railways, ports and residential complexes. The government has retained the new section 80 CCF under the Income Tax Act, 1961, which allows for deduction of taxable income of Rs 20000 in addition to Rs 100000 as per the existing norm, provided that the investment is made in long-term infrastructure bonds.

Long-term infrastructure bonds can be issued by IFCI, LIC, IDFC and Non-Banking Finance Companies (NBFCs) that are classified as infrastructure finance companies by the RBI. The bonds will be available for a minimum tenure of 10 years, with a lock-in period of 5 years. Only Resident Individuals (Major) and HUFs can invest in these bonds.

One such company, IFCI, is raising funds aggregating to Rs 100 crore in the form of long-term infrastructure bonds. The minimum application for the bond is Rs 5000 (FV), and the application can be made in multiples thereof. The issue opened on 21st September, 2011, and will close on 14th November, 2011.

There are 4 options available for investors, where the first and second are for a tenure of 10 years, with a coupon rate of 8.50% p.a., while the third and the fourth are for a tenure of 15 years, with a coupon rate of 8.75% p.a. The bond comes in with a lock-in period of 5 years, with a buyback option.

The following is the table containing the various options available for investors:


Particulars Option I Option II Option III Option IV
Minimum Application Rs 5000
Horizon 10 Years 15 Years
Coupon Rate (%) 8.5 8.75
Interest Payment At the time of redemption Annually (every December) At the time of redemption Annually (every December)
Buyback option  At the end of the 5th and 7th Year At the end of the 7th, 10th and 12th Year
Redemption Amount at the end of (Rs)
Year 5 7519 5000 N.A. N.A.
Year 7 8851 5000 8995 5000
Year 10 11305 5000 11569 5000
Year 12 N.A N.A 13682 5000
Year 15 N.A N.A 17596 5000
Lock-in Period  5 years from the deemed date of allotment

The following table shows the effective yield that an individual would get if he/she invests in the bond, assuming an investment of Rs 5000 and the highest tax bracket of 30.9%. 


Option I Option II Option III Option IV
Investment Amount Rs 5000
Tax Rate  30.9
Tax Saved Rs 1545
Net Purchase Price Rs 3455
Effective Yield To maturity (%) Pre tax


After 5 Years  16.83 18.49 N.A N.A
After 7 Years 14.38 16.2 14.65 16.52
After 10 Years  12.59 14.55 12.85 14.88
After 12 Years N.A N.A 12.15 14.28
After 15 Years N.A N.A 11.46 13.71

We, at DSIJ, feel that one should invest in the bond and not wait for last minute tax planning. We advise investors to select Option II to get the best yield to maturity, and to use the buyback option after 5 years.

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