Personal Finance

Bond with the best

Parvatha Vardhini C. | Updated on November 13, 2017




As the curtains come down on this financial year, taxpayers looking for eleventh hour savings options have two more infrastructure bonds to choose from. These issues from Power Finance Corporation (PFC) and IDFC (tranche 3) help save taxes for an investment of up to Rs 20,000 under section 80CCF. Linked to the 10-year gilt yields, interest offered on these bonds has trended steadily up and current rates of 8.3 and 8.5 per cent offered by PFC for a 5 and 7-year buyback option respectively are the highest among the bonds that have hit the markets so far. IDFC too, offers a coupon rate of 8.25 per cent.

Rates on forthcoming issues are not likely to be as attractive, given that yield on gilts have softened in recent times. These issues are hence a good opportunity for investors to lock in to.

PFC 5-year buyback

PFC and IDFC are issuing infrastructure bonds with a face value of Rs 5,000 each. While the minimum investment for PFC is one bond, IDFC requires a subscription to at least two bonds. Both issuers offer a choice between a cumulative interest and an annual payouts as well as a choice between buyback after a specified period and redemption at maturity. If you are not looking at regular income, the cumulative option is superior as it gives the benefit of reinvestment of interest at the coupon rate. The buyback option bestows the flexibility to exit if better rates are available after the five-year period. As the bonds are to be listed, investors can also exit through the markets after the lock-in period of five years. When transferred, it will be treated as long-term capital asset and subject to capital gains tax. Such exit will, however, be exposed to interest rate movements which can depress or shoot up bond prices.Going by the rates offered and the post tax yields, the cumulative and 5-year buyback option from PFC appears to be the best. Investors in a higher tax bracket will be able to enjoy greater benefits than those in a lower slab. The tax exemption on the initial investment also significantly improves the yields on these bonds. An investment in the 5-year cumulative option of PFC gives a post-tax yield of 14.14 per cent for someone in the 30 per cent tax bracket. In comparison, IDFC's 5-year cumulative option offers a marginally lower post-tax yield of about 13.7 per cent for the same bracket. Even within PFC, yields for other choices are lower. If someone opts for the 7-year buyback option in PFC which carriers a higher interest rate, post-tax yields for the highest tax bracket is only 12.04 per cent. Even for those who choose the 5-year buyback option but are in the 10 per cent bracket, the yield works out to only 9.92 per cent post-tax. Moreover, yields also drop significantly in both the offers if you choose to redeem at maturity because the upfront tax savings will be spread over a longer period.

PFC enjoys a ‘LAAA with stable outlook' from ICRA and ‘AAA/Stable' rating from CRISIL while IDFC has a LAAA rating from ICRA. The PFC issue is open till March 22; IDFC's tranche three closes on March 16.

Published on March 05, 2011

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