Also read about the REC Infrastructure bonds here or the IDFC Infrastructure Bonds Tranche 2 here.
Like NPS, I have not written much about Infrastructure Bonds, and reader Gaurav helped me yet again by providing some information to start off this post about Infrastructure bonds, and a big thanks to him for that.
Since IDFC is coming out with its long term infrastructure bonds – I thought I’d take this opportunity to tell you about the IDFC infrastructure bonds, as well as cover the basic concept as well.
Tax Saving Long Term Infrastructure Bonds
A popular reason to invest in long term infrastructure bonds is because they allow you to reduce Rs.20,000Â from your taxable income over and above the Rs. 100,000 limit under Section 80 (C).
So, the most you can reduce your taxable income without using the long term infrastructure bonds is Rs. 100,000, but investing money in these bonds gets you an extra Rs. 20,000 off your taxable income, and you can reduce your taxable income by a total of Rs. 120,000 by investing in these long term infrastructure bonds.
This increases your effective yield because along with the interest you earn on these infrastructure bonds, you save on tax as well.
These bonds are good for a maximum of Rs. 20,000 as far as the tax saving aspect is concerned, so if you buy bonds worth Rs. 30,000 and nothing else, even then the maximum you can reduce from your taxable income is Rs. 20,000 because that is the cap on tax benefits on infrastructure bonds.
From whatever I’ve read – I think that the Direct Tax Code (DTC) will not impact the tax saving aspect of these long term infrastructure bonds, but if someone knows otherwise, then please leave a comment about it; I think there is a little bit of uncertainty about this.
Features of the IDFC Long Term Infrastructure Bond
The tax aspect that I spoke about earlier is of course one of the major benefits of the IDFC Infrastructure bonds, but let’s take a look at some of its other features as well.
Interest Rate of 7.5% or 8.0%
These bonds are getting issued under two lock in options:
1. Ten year maturity: The bond will be issued with a ten year maturity and offer 8.0% interest per annum.
2. Ten year maturity with an option for buy-back after 5 years: This bond will also be issued with a ten year maturity, but there will be buy back option after 5 years. The interest rate on this is 7.5% per annum.
Further, under each of these options, you can choose to get the interest accumulate or paid out to you annually.
Minimum Investment in the IDFC Long Term Infrastructure Bond
The face value of the infrastructure bond is Rs. 5,000, and you have to apply for a minimum of two bonds, so the minimum investment in this infrastructure bond is Rs. 10,000.
Open and Close date
The infrastructure bond issue opened on September 30th 2010, and will close on October 18th 2010.
Credit Rating
IDFC has received the LAAA by ICRA which is it’s highest rating, and these infrastructure bonds are secured debt also, so in that respect they are relatively safe.
Listing on the stock exchange
After the initial lock in period, the bonds will list on NSE and BSE, and you’d have an option of selling them on the exchange if you don’t want to wait till maturity.
How do these bonds compare with fixed deposits?
A quick look at my fixed deposit interest rates page shows me that most banks are currently offering between 7.25% to 8.00%, so the interest rates on the IDFC bonds are quite comparable.
However, and this is a big however, there are several banks that offer interest rates of 7.5% or thereabouts for lower durations like 2 or 3 years as well.
So, you could potentially be stuck with a lower interest rate if interest rates climb up in the future.
The other thing is that the IDFC Infrastructure bonds compound annually, whereas some of the bank fixed deposits might compound quarterly which gives you a slight edge as well.
How can you invest in IDFC Infrastructure Bonds?
First off, let me tell you that you can’t invest in these bonds by writing an email to me. Regular readers won’t believe the number of emails I get from people who want to invest in Tata Motors or Sriram Finance fixed deposits. I think the people who write these emails are mostly search engine visitors, so I hope at least some of them will see this.
Okay, now that we have that out of the way, you can invest in the IDFC infrastructure bonds by going through your broker like ICICI Direct or by approaching a bank that’s the authorized to sell it.
Here are the details from the IDFC page:
To Invest in IDFC Infrastructure Bonds
Direct No. Internal Ext No. Darshana Thanawala : 022-4342 2860 22860 Pooja Pawar : 022-4342 2887 22887 Pooja Panchal : 022-4342 2849 22849 Contact / Visit : Any of the nearest Lead Managers / Brokers ( listed below )
LEAD MANAGERS CITIGROUP GLOBAL MARKETS INDIA PRIVATEÂ LTD KOTAK MAHINDRA CAPITAL COMPANY LTD ENAM SECURITIES PRIVATE LTD IDFC CAPITAL LTD LEAD BROKERS Kotak Securities Ltd. Enam Securities Private Ltd Sharekhan Ltd JM Financial Services Pvt. Ltd ICICI Securities Ltd RR Equity Brokers ( P) Ltd SMC Global Securities Ltd Bajaj Capital Ltd Almondz Global Securities Ltd HDFC Securities Ltd NJ India Invest Private Ltd INVEST ONLINE WITH Sharekhan Ltd ICICI Securities Ltd HDFC Securities Ltd Queries : For any Queries on IDFC Infrastructure Bonds
Email : [email protected]
Website : www.idfc.comCall : 022 – 43422 860 / 43422 887 / 43422 849
Issue closes : October 18, 2010
As a final word, thanks to Gaurav for nudging me to write this, and please leave your comments to add any thoughts you might have.
Click here to read some more points about the IDFC Infrastructure Bonds.
Hello Dear !!!!
Can you pls suggest me the best Mutual fund for 1 and 1-1/2 year locking.
I want to invest and there may be the chances that I will have to withdraw the complete monies.
Kindly suggest.
Rgds,
PD
Sorry PD, but I haven’t done that research, and really don’t know about best mutual funds you could look at.
manshu thanks for giving the yeild calculation. Now can we get the better one L&T or IDFC?
You can take a look at the yield tables for both based on your tax bracket and time period on these pages, and compare them:
http://www.onemint.com/2010/10/18/lt-infrastructure-bonds-review/
http://www.onemint.com/2010/10/12/idfc-infrastructure-bonds-faq/
Anyone have any reports about the L&T infrastructure bonds? http://p1n.in/tEM Thinking of investing here..
You can read the newly posted review on this site here: http://www.onemint.com/2010/10/18/lt-infrastructure-bonds-review/
this is not a very good option.
if you don’t invest in this your 20K will become 14K post tax (assuming 30% bracket) and if you invest 14K in any MF for 5 years at an avg return of 8% pa you earn more than this bond since earning from a 5 year MF will be tax free. Going the MF route is less hassel, more liquid and more secure.
Hey.. thanks for these updates.. they are really helpful.
Just wanted to check if any other such bonds are to be issued in the near future ( iv heard not all firms are authorized to issue these) and also whether the int rate offered by IDFC is better than those offered by ICICI & IDBI
I haven’t heard of any plans yet, but that may just be because I am unaware of such issue.
Hey Kunal, I came to know today that L&T Finance is also coming out with such an issue which opens on Nov 4th and will have 80CCF deduction. The bonds will have 10 year tenor and the bonds with a buy back option within five years, will offer interest of 7.5 per cent, while those for seven years will give 7.75 percent per annum.
i fall in tax bracket of 20% . how to calculate the yeild. Can you give illustration,
Let me take a shot at calculating yield by using Series 4 as an example:
Investment 5000
Reduction in taxable income: 5000
Tax @ 20.6% 1030
Net Investment 3970
Buyback amount after 5 years 7180
Compounded Annual Growth Rate 12.58%
On their page they have shown yields for various options. http://www.idfc.com/infrastructure_bonds.htm
This is the page I used to calculate CAGR:
http://www.onemint.com/2008/10/09/cagr-calculator/
Do we need a demat account to invest in the IDFC infrastructure bond ?
They made some changes where now you can buy it in physical form also, so if you checked earlier and found the answer to be no, please check again.
Hi, Could you please provide details about
1. For this we have to open a Demat account
How much it will come for opening this, broker fee and maintanance charges?
2. How much Tax it will come for interest of this Bond?
Is this realy worth for a 10% tax Slab person compare to FD?
Have you already invested the Rs.1 lakh in tax saving instruments? If you’ve not reached that upper limit then there are other avenues of saving tax, and you don’t really need to open a demat account just for this. Have you reached that limit?
Hi Manshu,
Yes, I have already invested RS 1 Lakh. I have one Home loan and LIC…
Hi Jayan, In that case you will save about an extra 2k if you invest in these funds, and the rate of interest is comparable to FDs of the same maturity.
I see that they have made some changes to allow investors to invest in physical form also, so you may not need to open a demat account just for this.
So, it’s up to you to see if the tax savings are worthwhile in your tax bracket or not for you. The other thing to consider is some other corporate could come out with a FD with a higher interest rate as well.
So, I’d consider all these things before making a decision.
Hi just heard some news that SBI is coming with similar infrastructure bonds with maturity of 10 & 15 yrs and with interest of 9 and 9.25 percent resp. is it true?
I haven’t heard or read about it….it might be true, but I’m not aware of it. Where did you hear this?
Hi, Its come in todays ET about the SBI bonds opening from 18th. will it not have the benefits of the IDFC infra bond?
I just read about it…..they don’t have the same tax benefit as these IDFC ones. In fact, looks like they don’t have any tax benefits at all.
is the interest we earn on this bonds tax free as well ???… plz reply asap as the close date is 18th n today is 12 th
thx
No, the interest itself is not tax free.
What is the minimum lock in period after which these will be listed?
After the initial lock in of 5 years, it will list in the stock exchange.
Hi Manshu,
Can we trade series 1 and 2 funds as well after 5 years lock in period?
If yes, why would anyone want to go with series 3 & 4 funds?
Thanks,
Divyesh
Hi Divyesh,
As far as I can see they are going to be listed, but I don’t know the answer to the second part of your question, as I am not familiar with the practical dynamics of bond pricing, so maybe someone else can answer that better.
Thanks
My take on it. They will be traded in the market and the price will be fixed by market forces, demand and supply of those bonds etc. If people want to play safe they will always go for a buy back option. Also if you have better instruments like stocks and derivatives(more volatile than bonds) why would you go for trading on bonds?
why the copulsion of dmat account.people will be unnecessarily open dmat account and bear the hassel as well as cost
Not sure about the reasons for that.
Actually, there is no compulsion of opening a demat account, and you can subscribe to these bonds in physical form also.
the brokers are insisting that demat is compulsory
Other than IDFC , which other Infrastructure company has come out for these type of Bonds?
I think ICICI and IDBI had come up with these some time ago, but are not currently open for subscription.
Which series one should invest & why..specially to get tax exemtion u/s 80D and maximum interest advantage – Series 1 & series 3?
To the best of my knowledge 80D is for getting tax exemption on insurance premium and doesn’t apply to interest from infrastructure bonds.
It’s the 20,000 over and above the 1 lakh that you can deduct from your taxable salary, which is the specific tax benefit from these infrastructure bonds, and the higher your tax bracket the more you gain.
Dear Manshu ,
Its a new section 80 CCF , WHICH ALLOWS YOU TO INVEST 20 K MORE over and above your 1 lac limit .
That’s actually one of the first points in the post under the “Tax Saving Long Term Infrastructure Bonds” section.
The question was about 80D
thanks for our information
You’re welcome…will you be investing in these infra bonds?