IFCI Infrastructure bonds - Should you subscribe?
By Vidrum Mehta |
10/25/2011 12:57 PM Tuesday
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:
|Coupon Rate (%)
||At the time of redemption
||Annually (every December)
||At the time of redemption
||Annually (every December)|
||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)|
||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%.
|Net Purchase Price
|Effective Yield To maturity (%) Pre tax
|After 5 Years
|After 7 Years
|After 10 Years
|After 12 Years
|After 15 Years
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.
Find More Articles on: Markets, DSIJ Mindshare, DSIJ Magazine, Infrastructure Bonds, Personal Finance, Product, Mid Cap