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.
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 detailsÂ 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
Call : 022 â€“ 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.