Personal Finance

IDFC Infrastructure Bonds: For additional tax savings

Parvatha Vardhini C. | Updated on February 05, 2011


Having mopped up about Rs 471 crore through its first tranche of long-term infrastructure bonds, IDFC has come out with the second tranche now.

Issued under section 80CCF of the Income-Tax Act, investments up to Rs 20,000 in these bonds are tax exempt. This option is available over and above the Rs 1, 00,000 savings limit under section 80C for investors.

Bank deposits closing in

Coming in the last quarter of the financial year, the offer seems attractive for those who still have tax planning to do.

But it may not benefit everyone. This is because five-year tax saving deposits with banks under Section 80C are beginning to look inviting. For example, after recent revisions, the tax saver deposits of IDBI Bank and City Union Bank offer 8.6 per cent and 9.5 per cent interest respectively, more than the 8 per cent that this bond offers.

Post-tax yields on these deposits will also be higher than on the bonds.

The offer is also not recommended for those who have surplus funds but need liquidity, as there is a five-year lock in. These investors do have shorter term options available.

There is a plethora of choice across different maturities among bank deposits itself. For instance, SBI's 555-day special deposit scheme offers 9 per cent returns; IDBI has a 1100-day scheme at 9.25 per cent.

With banks actively scouting for deposits to fund credit growth and with rate hikes in the forthcoming monetary policy becoming a foregone conclusion, bank deposit rates may go up further in the near-term. Besides, NBFCs have also revised their deposit rates recently.

Shriram Transport Finance offers 10.75 per cent on 3-5 year deposits. Dewan Housing Finance offers 9.25 per cent interest on deposits beginning from a period of 36 months.

So, this offer suits investors who have exhausted their 80C limits but have more tax planning to do or others who necessarily want exposure to these bonds as a diversifier. But it must be added that investors need not lock-in the entire amount of Rs 20,000 with one issuer either.

An issue from REC has opened recently. Given that it has a sanction to raise up to Rs 3,400 crore this fiscal, IDFC itself may come up with another issue. Besides, IIFCL, PFC and LIC are expected to come up with similar issues in the near-to-medium term.

Choose cumulative, buyback option

With monetary tightening expected to continue, the yield on 10-year government securities may be pushed upwards further, allowing infrastructure financing companies to price bond issues at higher rates.

Investors can retain a portion of their funds to take advantage of this situation.

IDFC is issuing 10-year infrastructure bonds for Rs 5,000 each.

The minimum application is for two bonds.

It comes under two options – both offer an 8 per cent coupon rate with a buyback option after five years.

The choice is between a cumulative interest (annual compounding) scheme and an annual payout scheme.

Investors can choose the cumulative and buyback option.

This gives the benefit of reinvestment of interest at the coupon rate and the flexibility to exit if better rates are available after the five-year period.

The tax exemption on the initial investment significantly improves the yields on such bonds.

Investors in a higher tax bracket will be able to enjoy greater benefits than those in a lower slab.

For example, the scheme gives an annual post-tax yield of 13.67 per cent for those in the 30 per cent tax bracket. The post-tax yields stand at 11.45 per cent and 9.58 per cent for those in the 20 per cent and 10 per cent slabs respectively.

As the bonds are to be listed on the Bombay Stock Exchange and the National Stock Exchange, investors can also exit through the markets after the lock-in period of five years if this option appears more attractive then.

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 perk up bond prices.

The offer closes on Feb 4.

Published on January 24, 2011

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