What are infrastructure bonds?
In 2010, the government introduced a new section 80CCF under the Income Tax
Act, 1961 to provide income tax deductions for subscription to long-term infrastructure bonds. Subsequently, the Central Board of Direct Taxes passed a Notification No. 48/2010/F.No.149/84/2010-SO(TPL) dated July 9, 2010.
These long term infrastructure bonds offer an additional window of tax deduction on investments up to Rs. 20,000 for the financial year 2010-11. This deduction is over and above the Rs. 1 lakh deduction available under sections 80C, 80CCC and 80CCD read with section 80CCE of the Income Tax Act. Infrastructure bonds help in intermediating the retail investor's savings into infrastructure sector directly.
About the issue
IDFC is looking to raise up to `3,400 crore this financial year. The bonds come with a maturity of 10 years, and a lock-in of five. They will be issued in 4 different series:
> Series 1 pays bondholders an interest of 8%, which is payable annually
> Series 2 pays an interest of 8% as well, but the interest will keep getting reinvested into
the bond
> Series 3 pays 7.5% interest annually, but comes with a buyback option
> Series 4 pays 7.50% interest which gets reinvested into
the bond, and comes with a buyback option
Investors cannot shift from one series to another once the amount is paid. However, one can invest in all four series by paying `5,000 in every series.
The real return
What is interesting is that even though the interest paid on these bonds are in the range of 7.5-8%, the actual return works out to be much greater, once you factor in the tax deduction. The initial investment into the bond saves tax. And since a rupee saved is a rupee earned, paying lesser tax is similar to having invested lesser to start with.
For example, let us say you fall into the top tax bracket of 30.9%
and invest `20,000 in these bonds. This means your tax outgo will be lower by `6,180 (30.9% of `20,000), which in turn means that you will be receiving an interest of `1,600 per year (8% of `20,000) on an investment of `13,820 (`20,000 - `6,180).
This in turn pushes up real return, which, as can be seen from the accompanying table, can be as high as 15.74% in case of Series 4 bonds for those falling in the top tax bracket.
Maturity & lock-in
The maturity of the bonds is 10 years. The lock-in period,
however, is limited to five years. The bonds will be tradable on
the Bombay Stock Exchange and the National Stock Exchange after the lock-in period expires. Series 3 and 4 come with the buyback option which allows the company to buy back the bond from investors once the lock-in period is over.
Is your money safe?
Rating agency Icra has given the IDFC bonds an LAAA
rating, which is the highest rating that an infra bond can get. Over and above this, the Government of India owns 20.08% in the company.
Conclusion
These bonds make for a great investment once you have exhausted your Section 80C limit of `1 lakh.
Remember, however, that you can invest more than `20,000 in these bonds, but you can claim tax deduction on a maximum of `20,000.
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