IFCI Infrastructure Bonds: Tax Saving Bonds under Section 80 CCF

by Manshu on November 23, 2010

in Fixed Deposits

Also read about the REC Infrastructure bonds here or the IDFC Infrastructure Bonds Tranche 2 here.

Update: There has been a change in terms, and you can now invest in these bonds in physical form also. Here is the link to relevant IFCI page.

The issue has been extended till January 12 2011

The IFCI Infrastructure bonds are the latest infrastructure bonds to be issued with the 80CCF benefits, and are the second tranche from IFCI, which issued them earlier this year as well.

The IFCI bonds are issued with section 80CCF benefits which means that they will get you a tax benefit of reducing your taxable income over and above the Rs. 100,000 under Section 80C with a cap of Rs.20,000.

The issue has been rated “BWR AA” by “BRICKWORK RATINGS INDIA PVT LIMITED” which means that they are rated as instruments with high credit quality.

IFCI Infra Bond

IFCI Infra Bond

Here are some other details about them.

IFCI Infra Bond Options

There are 4 series that you can choose from with a combination of getting interest paid annually, cumulatively, and having a buyback or not.

Here are the details of the 4 series.

Options I

Buyback &

Non – Cumulative

II

Buyback &

Cumulative

III

Non Buyback &

Non – Cumulative

IV

Non – Buyback &

Cumulative

Face Value Rs. 5,000 Rs. 5,000 Rs. 5,000 Rs. 5,000
Buy Back Option Yes Yes No No
Coupon 8.00% per annum 8.00% compounded annually 8.25% 8.25% to be compounded annually
Redemption Amount Rs. 5.000 Rs. 10,795 Rs. 5,000 Rs. 11,047
Buyback allowed after 5 years 5 years NA NA

As you probably noticed IFCI didn’t show yields in the same manner as L&T and IDFC, where they took the tax benefits based on various slabs and showed yields at different tax slabs and interest payments. This is probably a good idea given the various limitations of the way those yields were calculated.

How does the IFCI infrastructure bond buyback option work?

At the time of selecting a series you have to select either series 1 or series 2, which allow the buyback after 5 years lock in period. To exercise the buyback you have to write to IFCI to request it, and this has to be done in the month of November for the year when you want to exercise the buyback.

Open and Close Date of the IFCI Infra Bond

Opening date of the issue: November 16th, 2010 and Closing date of the Issue: December 31st ,2010. They can close earlier as well if their entire demand is met.

Is a Demat account necessary to apply for the IFCI Infra Bond?

Yes, right now it is necessary to have a demat account to apply for these bonds as they won’t be issued in physical format. Even the IDFC bonds started out as Demat only, and were later on changed to allow physical forms also. The target sum to be raised by IFCI bonds are much lesser than the IDFC ones, so they might not feel the need to change and include the physical format as well.

Will tax be deducted at source from the interest payment?

These IFCI 80CCF bonds will not attract TDS, however the interest itself is taxable at your hands. So, the bonds don’t attract TDS, but it doesn’t mean they are tax free.

Will the bonds list in a stock exchange?

Yes, IFCI plans to list these bonds on the Bombay Stock Exchange (BSE), but from reading the information memorandum it seems to me that you can only sell these bonds after the lock in period of 5 years.

Can NRIs invest in the IFCI Infrastructure bonds?

NRI customers are not eligible to apply for the issue.

What if you have already bought another infrastructure bond?

If you have already bought another infrastructure bond, and exhausted the limit of Rs. 20,000 then you won’t get any further tax benefit by buying this bond. There are also several banks that offer 8% interest for terms less than 5 years, so you won’t get much value out of locking your money in this instrument for 5 years.

How can you buy the IFCI infrastructure bonds?

You can buy these bonds through your broker like ICICI Direct, or can submit an application form in one of the bank branches that are accepting them. The information memorandum lists down a large number of HDFC bank branches so you can go to one near your house, and they might be selling the bonds or can at least tell you where you will get them.

Should you wait for another issue?

This issue is 50 basis points, or half a percentage higher than similar L&T bonds issued earlier, and reader Amit Khandelia actually left a comment about LIC coming up with a future issue, and possibly even offering term insurance free with their offer.

IDFC has also indicated interest in coming up with a future issue, so they might come up with another issue too.

The advantage with waiting is that you may get a slightly higher interest rate, maybe half a percentage or one percentage more, but as I said earlier if you’re able to wait and get a bond which offers a percentage higher, and you invest the maximum Rs. 20,000 in it – that means an additional 200 bucks extra in a year; what is that worth to you? How many hours of Googling and speculating is it really worth?

The advantage of getting it now is that you can get this one thing done with, and have plenty of time to receive the certificates for tax proofs or whatever else you need.

This is a personal decision really, but something worth keeping in mind the next time you speculate on whether you should wait or go ahead with it.

Please leave a comment if you have any questions or observations.

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