IDFC Long Term Infra Bonds - Tax saving option?
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After IFCI, it’s now time for IDFC to tap the market with long term infrastructure bonds. The bonds will be issued in one or more tranches not exceeding Rs 5000 cr for FY 2011-12. Having said that, the bond is offering a lucrative interest rate of 9%, and investors should not wait for the next tranche to come, as the interest rate would be different. IFCI, which closed on 19th Nov, 2011 (originally scheduled to close on 14th Nov, 2011), had an interest rate of 8.50% and 8.75% for tenures of 10 and 15 years respectively.
Long term infrastructure bond investments come under Section 80 CCF of the Income Tax Act, 1961. Investment in such bonds allows for an income tax deduction of Rs 20000 in addition to Rs 100000 that is the existing norm. The 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. The interest earned on the bonds, however, is taxable.
After meeting the issue related expenses, the funds raised will be used towards infrastructure lending. The minimum application value for the bond is Rs 10000 (2 bonds of Rs 5000 each), and the application can be made in multiples of one bond (face value Rs 5000) thereafter. The Issue opens on 21st Nov, 2011 and closes on 16th Dec, 2011. The bonds are proposed to be listed on the NSE and BSE. There are 2 options available, of which Option I offers annual interest payment, while the second offers cumulative payment. Both the options have a coupon rate of 9% and a tenure of 10 years. The bond comes in with a lock-in period of 5 years and with a buyback option.
The following is the table of various options that are available to investors:
| Particulars | Option I | Option II |
| Face Value | Rs 5,000 |
| Minimum Application | Rs 10,000 (i.e. 2 Bonds) |
| Horizon | 10 Years |
| Coupon Rate (%) | 9.00 p.a | 9.00 compounded annually |
| Interest Payment | Annual | Cumulative |
| Maturity Amount | Rs 5,000* | Rs 11,840* |
| Buyback option | At the end of 5th year |
| Buy back Amount at the end of 5 th year | Rs 5,000* | Rs 7,695* |
| Lock in Period | 5 Years from the deemed date of allotment |
| Tax Rate (%) | Effective Yield (Pre tax) if Invested till Maturity |
| 10.3 | 10.73 | 10.19 |
| 20.6 | 12.76 | 11.55 |
| 30.9 | 15.21 | 13.11 |
| Tax Rate (%) | Effective Yield (Pre tax)if opted buy back option |
| 10.3 | 11.85 | 11.4 |
| 20.6 | 15.17 | 14.15 |
| 30.9 | 19.14 | 17.37 |
| * On Face value |
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We, at DSIJ, feel that one should invest in the bond and not wait until the last minute for tax planning. We would advise our investors to select Option I, which would give them the best yield to maturity, and to use the buyback option after 5 years.