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Infrastructure bonds are the latest avenue for investors looking to park funds in debt instruments. A number of companies have announced plans to raise money through this route. While IFCI has already raised Rs 100 crore, this is the first time after additional tax breaks for investments in infrastructure bonds were announced that an amount over Rs 4,000 crore is being raised.
While IDFC and L&T Infrastructure issues are open for subscription, PFC and LIC are the next in line. Here’s a snapshot of what these issues have in store for investors.
| QUICK FACTS | ||
| | IDFC | L&T Infra |
| Coupon (%) | 7.5, 8 | 7.5,7.75 |
| Duration (years) | 10 | 10 |
| Buyback/call option | yes* | yes |
| Listing | NSE & BSE | NSE |
| Issue size (Rs Crores) | 3400 | 700 |
| Tax benefit | Yes | Yes |
| Lock in period (years) | 5 | 5 |
| Loans against bonds | NA | NA |
| *Series3 and 4 bonds only | ||
| EVENLY MATCHED | ||
| Investor tax slab | Yield to investors on maturity* | |
| (In %) | IDFC | L&T Infra |
| 10.3 | 8.67 | 8.68 |
| 20.6 | 10.01 | 10.02 |
| 30.9 | 11.55 | 11.56 |
| * 7.5% 10 yr cumulative bonds | ||
Tax Benefits
Under Section 80CCF, any individual or Hindu undivided family can invest up to Rs 20,000 in infrastructure bonds and avail of tax benefits. This will be over the Rs 1-lakh deduction allowed under Section 80C. So, an investor in the tax bracket of 30 per cent can save an additional Rs 6,000, while those in the lower tax bracket can save Rs 2,000. Moreover, infrastructure bonds offer stability of fixed returns and are reasonably safe.
How they Compare
Other high yielding instruments which help save tax, include employee provident fund (returning 9.5 per cent for financial year 2011), public provident funds (8 per cent) and five-year fixed deposits. PPF gives higher returns that are non-taxable although liquidity is not as good as the bond or a fixed deposit. Unlike PPF and EPF, interest income is taxable for infrastructure bonds.
A debt mutual fund gives good returns, don’t get any tax breaks and are more risky. According to Value Research, a mutual fund rating agency, debt-oriented hybrid funds have returned 10.68 per cent in the last one year. While the returns on EPF and PPF are higher, infrastructure bonds score over instruments likepost office schemes which give similar returns but don’t have tax benefits. The key benefits for the investors in infrastructure bonds are breaks on the Rs 20,000 additional investment, higher yields and good liquidity.
Liquidity
The infrastructure bonds have a maturity of 10 years but a lock-in period of five years. The investor can ask the issuer to buy back his/her bonds after the lock-in period. Alternatively, the investor can choose to trade these in stock exchanges. According to Dwijendra Srivastava, head, fixed income, Sundaram BNP Paribas AMC, “Listing is more to do with being more tradeable on exchanges and there may not be any listing gains.
Historically, retail bonds trade at par on exchanges. Trading done on exchanges will not be eligible for tax benefits as it will not meet the five-year lock-in requirement. However, investors looking to clock some gains can subscribe to bonds in addition to Rs 20,000 and trade in such excess units. Historically, volumes have been thin in retail bonds trading and we don’t expect much trading activity in these bonds”.
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