Category: Fixed Deposits

I’ve received a few emails about when applicants will receive the IDFC infrastructure bonds, and since the company didn’t announce when this will happen before hand – people have been wondering when they will get the bonds.

Readers Ajay, Loney, Satish, Nageswara, Sandeep, Sangram, and Subhro (among others – it’s a really big thread so I couldn’t include all names) have left comments sharing their bond status, and that helped a great deal in getting an idea on what’s going on with this.

A big thank you to all of you for keeping everyone informed!

I don’t think everyone who applied for the IDFC Infrastructure bonds is subscribed to the comments on that post, so I thought I’d create a post from the information shared by these folks.

Let’s take a look at some of the more important points from that thread:

1. Allotment took about 3 weeks: The bond issue closed on 22^nd October, and people have only started seeing the bonds credited to their demat accounts, so the time from issue closure to the actually seeing the bonds has been around 3 weeks. This will form a good reference for other infrastructure bond issues in the future.

2. Not everyone has received the bonds yet: There seems to be some mechanism by which bonds are being gradually credited across applicants, and not everyone has received these bonds yet. If your account has not been credited yet, then there is no need for alarm, as people have only recently started seeing bonds credited, and it might still take a few days for it to appear for you.

3. NSDL sent an SMS about credit of IDFC Bonds: The depository – NDSL – had sent a SMS letting people know that the bonds have been credited. However, the bonds were not visible in the account immediately. So even if you received the SMS that doesn’t necessarily mean you will see the bonds in your demat account as well.

4. No one has received the physical certificate yet: The people who have reported getting the bonds have all applied through a broker, and have demat accounts, and none of them have received the physical certificate yet. So if you have applied without a demat account, then it might take longer still for you to get the physical certificate.

Don’t press the panic button if you haven’t received the bonds yet because you are not alone, and there are several others whose money has been debited, but the bonds haven’t been credited yet.  My guess is that you should start seeing them in your demat account in the next few days.

Future Infrastructure Bond Issues

Some of you have also expressed dismay at the fact that you missed this and the L&T issue, but were interested to buy the bond for tax saving and other purposes.

The good news for you is that IDFC as well as other issuers have said that they are going to come out with more such issues towards the end of the fiscal year because that is when most people are actively looking out for tax saving vehicles, and they are likely to do a lot better at that time than now.

Finally, some people have written in asking if it’s better to wait out for a higher rate of interest than investing in this offer.

I honestly don’t know what issuers are planning for the future, based on the lukewarm response, they might sweeten the deal, but I have no way of knowing for sure.

I’d say don’t lose perspective of the fact that the primary benefit of this is of tax saving. 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?

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. And once again – a big thank you to all of you fine guys who left comments and kept everyone informed!

Updated on Feb 27 2011.

Since we’ve had so many posts on bonds and tax saving instruments in the past few days I thought I’d keep the momentum going and write about tax saving fixed deposits in India today.

A tax saving term deposit has a tenure of 5 years, and a lot of banks offer these. They save tax because they reduce your taxable income when you invest in them up to a cap of Rs. 1 lakh, and come under Section 80C.

The interest earned from these fixed deposits is taxable, and tax will deducted at source as applicable.

These term deposits can’t be encashed before the expiry of 5 years, and you can’t pledge them to get any loans also.

Here is a list of some banks which offer these deposits along with the prevailing interest rates applicable as at November 3^rd 2010.  If you see any mistakes, want to add any other bank or have anything else to say – please leave a comment.

S.No.	Bank	Interest Rate
1	Axis Bank	8.25%
2	Allahabad Bank	8.00%
3	Bank of Baroda	8.50%
4	Bank of Maharashtra	8.30%
5	Canara Bank	8.75%
6	Central Bank of India	8.85%
7	HDFC Bank	8.25%
8	ICICI Bank	8.75%
9	IDBI Bank	8.75%
10	Indian Bank	?
11	Indian Overseas Bank	8.10%
12	J&K Bank	8.50%
13	Karur Vysya Bank	9.00%
14	Kotak Bank	9.25%
15	Punjab National Bank	8.50%
16	Punjab and Sind Bank	8.50%
17	South Indian Bank	8.75%
18	State Bank of Hyderabad	8.75%
19	SBI	8.50%
20	State Bank of Travancore	9.00%
21	Syndicate Bank	?
22	UCO Bank	8.00%
23	Union Bank of India	8.50%
24	Vijaya Bank	8.25%
25	City Union Bank	9.50%
26	Indian Bank	9.00%

Click here to see the interest rates comparison on regular fixed deposits.

Last week I took the L&T bond issue as an example to show how bond yields are calculated, and I thought I’d do a biggest post now to detail out some of the things said there so here goes.

There are a couple of tax saving bond recently issued by IDFC and L&T, so this is a good time to look at how the yield for these bonds are calculated, and some tools that will help you do so.

As you must have noticed the bond yields change with different plans, and I’m going to look at the IDFC issue with calculations to show how the yield on tax saving bonds are calculated.

Let me paste the details from the IDFC bonds here for quick reference because we will be using that as an example.

Investment Amount	Tax Slab	Series 1 Yield	Series 2 Yield	Series 3 Yield	Series 4 Yield
5,000	30.9%	13.89	12.06	17.19	15.74
5,000	20.6%	11.57	10.52	13.41	12.57
5,000	10.30%	9.64	9.18	10.23	9.86
Rate of Interest	———–	8.00% p.a.	N.A.	7.50% p.a.	N.A.
Buyback Amount	———–	5,000	10,800	5,000	7,180
Time in years	———–	10	10	5	5

Let’s look at a couple of concepts before we deep dive in the process of calculation itself. These concepts are:

Effective Purchase price of a tax saving bond depends on your tax bracket

All bonds have a face value at which you will buy the bond and that is your cash outflow, however that’s not your effective purchase price in the case of tax saving infrastructure bonds. This is because these bonds reduce your taxable income, thereby reducing your tax outflow, and your effective purchase price is the face value of the bond minus the tax it saved you.

Effective Purchase Price = Face value of the bond – Tax saved by its purchase

Let’s look at this taking the IDFC bond as an example:

Face Value	5,000	5,000	5,000
Tax Bracket	10.30%	20.60%	30.90%
Tax Saved on Face Value	515	1,030	1,545
Effective Purchase Price	4,485	3,970	3,455

As you can see your effective purchase price goes down as your tax bracket increases, and this is one of the major reasons their yield table shows a higher yield with a higher tax bracket.

No matter which series you take – your yield will go up as your tax bracket increases because you save more on taxes.

So that explains one part of it, and now let’s look at why yield varies within the same tax bracket.

A lower time period will give you a higher yield

If you remember the IDFC bond issue had series with and without an option of a buy-back. The series with an option of buy-back would have meant that you need to hold these only for 5 years, whereas the other series meant you held on to the bonds for ten years.

The reason the bond yield varies in these two cases is that the absolute tax benefit you get remains the same in both the cases, but in one case it is spread out over only 5 years, whereas in the other case it is spread out over 10 years. The tax you save will be the same whether you invest in the buyback option or not, and since the interest rate is much lesser than the tax savings – a longer time period lowers the yield.

So in this case if you compare Series 1 and 3 or Series 2 and 4 – everything is the same except the buyback period and that’s causing the difference in yield.

How to calculate bond yield when no interests are paid?

These series differ by two factors – buyback option, and payment of interest.

We looked at the buyback option and how it affects bond yield earlier, and now let’s look at payment of interest. One series pays out interest annually, whereas the other series doesn’t pay out any interest annually, but rather pays a lump-sum at the end of the time period.

Let’s first look at the yield for the series that pays a lump-sum.

You already know what your effective purchase price is, and you also know what you will get at the end of the time period, so all you need to do is to plug in these numbers in the Compounded Annual Growth Rate (CAGR) Calculator and see what the yield is.

Conceptually you are saying that if I start out with Rs. 3,455 (30.9% tax rate) then what is the rate of interest at which I should invest this sum, and also the interest earned every year, so that I reach at the amount at the end – Rs. 7,180 (series 4 example).

Here is how that table looks like.

Investment Amount	Tax Slab	Effective Purchase Price	Series 2 Yield (CAGR)	Series 4 Yield (CAGR)
5,000	30.9%	3,455	12.06	15.74
5,000	20.6%	3,970	10.52	12.57
5,000	10.30%	4,485	9.18	9.86
Buyback Amount	———–	——-	10,800	7,180
Time in years	———–	——-	10	5

The post about CAGR also details how it is calculated, so you can read more there.

In future to calculate any bond yield where there are no annual interest payments look for these elements:

• Face Value
• Tax Bracket
• Effective purchase price
• Time in years
• Buyback amount

Then use effective purchase rate, time and buyback amount in the CAGR calculator to find out the yield.

How to calculate bond yield when interest is paid yearly?

When the interest is paid out yearly – you need to use a formula called Yield To Maturity (YTM) and calculate the bond’s yield. There is a nice little calculator present on this site that you can use to see how this works out. Use Series 1 and 3 and you will get a table such as the one below.

Investment Amount	Tax Slab	Effective Purchase Price	Series 1 Yield (YTM)	Series 3 Yield (YTM)
5,000	30.9%	3,455	13.89	17.19
5,000	20.6%	3,970	11.57	13.41
5,000	10.30%	4,485	9.64	10.23
Buyback Amount	———–	——-	5,000	5,000
Time in years	———–	——-	10	5
Coupon Rate			8.00%	7.50%

If you input 3,455 in Current Market Price, 5,000 in Par Value, 8.00% in coupon rate, and 10 years – you will get your yield.

This formula assumes that whatever interest payments you received were re-invested at the coupon rate, and then takes the market value of the bond to calculate your yield.

In our example, this formula will say that you invested Rs. 3,455 initially, then get Rs. 400 at the end of every year which you will continue to re-invest at 8% and reap the benefit of compounding. Now this is an assumption so if you don’t actually end up investing your interest payment every year your yield will be reduced.

Factors not looked at while calculating yield on tax saving bonds

One obvious factor is the yield doesn’t take into account the taxes that you will end up paying on interest received. Other factor is that this formula doesn’t take into account any transaction costs that you incur.

I have another post lined up next week which looks at the limitations of the way these yields are being calculated in which I will cover some things that are not part of the way the yields are calculated by the issuer.

Conclusion

When you see a yield on a table – you might say higher is better, but then you need to keep in mind that in some cases to get the highest yield you will have to re-invest the interest payment yourself also.

Then there is the issue of time period also, would you much rather have your money back in 5 years or you are fine with keeping the money invested for 10 years since it is a relatively small amount.

Then of course, if you pay tax on that interest your yield goes down automatically by the amount of your tax paid.

I covered a fairly big area here, so if you feel that I got something incorrect, or something could be explained better please feel free to leave a comment, and I’ll try to answer it, or correct it as the case may be.

I’ve done a post about calculating yields on tax saving bonds, and on that post I focused on the mechanics of the yield calculation but that’s really the first step of the ladder.

You have to first understand how a yield is calculated in order to judge whether that’s the right way of calculating yields or not, and what are the limitations of it. I had this post originally scheduled for next week, but an email exchange with reader Amit Shah prompted me to post this earlier as that made more sense.

So, now that we are past the step of understanding how bond yields for tax saving infrastructure bonds are calculated let’s take a look at some more factors about these calculations.

1. They don’t take into account tax paid on interest: The way yields are calculated for the series that pays annual interest don’t take into account the taxes that you will pay on the interest received. This is just the way this calculation is done, and if you are comparing it with another instrument that you can invest in and won’t have to pay taxes on (like PPF) you should include taxes on interest in your calculation. However, if the instrument you are comparing these with also require you to pay tax then it may not make so much of a difference.

2. They don’t take into account capital gains on cumulative options: The cumulative option on these bonds mean that you will get a bond with a much bigger value at redemption compared with the face value. This will attract capital gains, but those are also not part of the calculation. Frankly, at this point I don’t know how those taxes come into play but these calculations are mute on them.

3. Yield on the shorter duration is calculated considering buyback has been exercised: The infrastructure bonds have come out with buyback options from the issuers where the issuer has the option to buy them back after say 5 or 7 years. This is a call option from the issuer which means that they may not exercise it, and you end up holding your bonds either till maturity or have to sell them on the exchange. The yields have been highest on the buyback options, so if they don’t exercise the buyback then the yield will reduce.

4. Yield to Maturity (YTM) assumes that you can re-invest the interest earnings at the same rate of interest: The YTM calculations are used to calculated yields on the series where the interest is paid out annually, and this assumes that the interest you earn will be invested by you in a security that earns the same rate of interest throughout the remaining period of the bond. This may not happen if you lose some part of the interest in taxes, or aren’t able to find another security that pays the same rate of interest as the original one.

5. They don’t take into account on bond listing: These bonds will list after an initial lock in period, and if the interest rates are higher at that time, then these bonds should list at a discount. In case that happens, and the issuer doesn’t exercise the buyback then you will either have to wait for the full term of the bond, or sell at a discount which will also reduce your yield.

Conclusion

It’s a good thing to be aware of yields because you obviously need them to compare with other products, but keeping these points in mind is a good reminder that the yield number is not cast in stone, and depends on a few other variables as well, and if some of these factors change then your yield will change as well.

I got a comment about how the yield for the L&T Finance Bonds have been calculated and though I have a slightly longer post scheduled on the topic later; I thought I’d do a quick one for now.

There are 4 series of L&T Finance Bonds, and two of them offer cumulative returns while two others offer annual returns.

L&T Finance Bonds: Cumulative Option

Let’s first look at the cumulative ones first, which is series 2 & 4. Cumulative series mean that you don’t get a payment every year, but get a lump-sum at the end of the bond buyback period.

In L&T Finance Bond’s case – Series 2 is 7.75% for 7 years, and Series 4 is 7.50% for 5 years, so using compound interest – you can calculate the amount after 5 and 7 years as follows:

	Cumulative Option
	Series 2	Series 4
Principal	1000	1000
Interest Rate	7.75%	7.50%
Time in years	7	5
Amount at  buyback period	1686.25	1435.63

From the above table you see the amount at the end of the buyback period in both the series. Now keep in mind that these are tax saving infrastructure bonds, so your effective purchase price is lesser than the face value of the bond. If you fall in the 30.6% tax bracket, then your taxable income reduces by the amount of L&T bonds you buy (up to a cap of 20,000).

So based on your tax rate, you need to calculate your effective price, and find out at what rate you need to invest that amount, and reinvest the interest earned on it to come at the final buyback amount (1,686.25 and 1435.63) calculated above. You can use the CAGR calculator on this site to help you arrive at the yield of these two series. That page has details on how this is calculated as well.

	Cumulative Option
	Series 2	Series 4
Principal	1000		1000
Tax Rate	30.90%		30.90%
Effective Purchase Price	691.00		691.00
Amount at  buyback period	1686.25		1435.63
CAGR	13.59%		15.75%

The last row in the table above contains the CAGR or yield on both these series, and what this shows you is that if you had invested Rs. 691 in Series 2 for 7 years at 13.59% compounded annually, you would’ve gotten 1,686.25 at the end of 7 years, which is what the yield of this series is.
L&T Finance Bonds: Annual Interest Option

In this case you get interest paid out to you every year, so you use a concept called Yield To Maturity (YTM). This formula takes into account the discounted cash flow, effectively seeing how much money you will get in total, and what it’s worth today. It also assumes that whatever money you get will be reinvested with the coupon rate or 7.75% in Series 1 or 7.50% in Series 4.

You can calculate the YTM using an online calculator or Excel. Plug in the Face Value, Market Price, Coupon Rate and Time in the calculator, and it will show you the YTM.

Here is how that table will look like.

	Cumulative Option
	Series 1	Series 3
Principal	1000	1000
Tax Rate	30.90%	30.90%
Market Price / Effective Purchase Price	691.00	691.00
Coupon Rate	7.75%	7.50%
Time	7 years	5 years
Yield to Maturity	15.23%	17.20%

The 17.20% number that you see in Series 3 basically means that the cash flows from this bond discounted at 17.20% will equal the present value of future cash flows at the same rate.

To come up with the 17.20% number you need to use Excel or an online calculator or something, but then after that you can take the cash flows for each period, discount it with the 17.20% and see what the present value of each amount in each period is, and the sum of those cash flows at 17.20% should be 0. This is just for those of you interested in diving further into the calculation.

Here is how the Series 3 table of what I am talking about look like.

	Series 3 Cashflows	Yield	1 + Yield	Time	Multiplier (Yield ^ Time)	Present Value (Cashflows / Multiplier)
Time 0	-691	17.2	1.172	–	–	-691
Time 1	75	17.2	1.172	1	1.172	63.993174
Time 2	75	17.2	1.172	2	1.37358	54.601684
Time 3	75	17.2	1.172	3	1.60984	46.588468
Time 4	75	17.2	1.172	4	1.88673	39.751252
Time 5	1075	17.2	1.172	5	2.21125	486.15013
					Sum	0.08

If you look at the last column of the above table – Present Value (Cashflows / Multiplier) that’s the column that shows you the present value of each of these payments at the discount rate.

So, 63.99 invested at 17.2% for 1 year becomes 75; 39.75 invested for 4 years at 17.20 will be 75 and so on.

So, this is basically how the yield for this L&T Finance bond is being calculated, and also the IDFC Infrastructure bond and you can read more about NPV, IRR and YTM at Wiki to get a better understanding of this calculation.

I hope this helped those of you who were trying to figure out the calculation, and if I’ve made any mistakes or if you have any other questions or comments please let me know.

And one last thing, these calculations don’t take into account taxes paid on interest payments; that’s just the way yields are calculated – pretax.

Click here to read the entire review of the L&T Finance Bonds.

Close on the heels of the IDFC Infrastructure bonds – L&T is also issuing infrastructure bonds beginning October 15th 2010, and closing on November 2 2010.

L&T Bonds: Tax Saving Infrastructure Bonds

These are classified as infrastructure bonds under Section 80 CCF which means that investing in them will reduce your taxable income by Rs. 20,000.

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.

L&T Infrastructure Bonds Features

There are 4 series of L&T Bonds, and though these bonds have a term of 10 years, there is an option of a buyback after 5 years or 7 years.

The interest rates, and effective yields of different plans are shown below:

Series	Tax Bracket	1	2	3	4
Face Value	—-	Rs. 1,000	Rs. 1,000	Rs. 1,000	Rs. 1,000
Interest Payment	—-	Annual	Cumulative	Annual	Cumulative
Interest Rate	—-	7.75%	7.75%	7.50%	7.50%
Maturity	—-	10 years	10 years	10 years	10 years
Buyback in years	—-	7 years	7 years	5 years	5 years
Yield on Buyback	30.9%	15.23%	13.59%	17.20%	15.75%
	20.6%	12.31%	11.36%	13.42%	12.58%
	10.3%	9.86%	9.44%	10.23%	9.86%

L&T Bonds Minimum Investment

The minimum investment needed for you to invest in these bonds is Rs. 5,000 because you have to apply for a minimum of 5 bonds, and the face value of each bond is Rs. 1,000.

Open and Close Date

Subscription opened on October 15th, and will close on November 2nd 2010.

Credit Rating

The L&T bonds have been rated CARE AA+ by CARE and LAA+ by ICRA which indicate high credit quality and that the rated instruments carry low credit risk.

How can you invest in the L&T Infrastructure bonds?

You can invest in these bonds either in the physical form or electronically through brokers like ICICI Direct. You can buy a form through one of the several agents across the country and invest in it through them as well.

Here is a list of banks listed on their website that can give you more information as well:

• Axis Bank
• DBS Bank
• HDFC Bank
• HSBC Bank
• ICICI Bank
• IDBI Bank
• ING Bank
• SBI Bank

They also have this cool link on their special website for this bond where you can enter in your contact details and they will contact you and help you.

If any of you do decide to contact them then I am really interested to know your feedback because I tried to get in touch with the numbers given in the IDFC website, and tried at least 10 times to no avail. I’d like to know if this is any better.

Tax on interest earned from the L&T Infrastructure bond

The interest itself is not tax free. It’s only the Rs. 20,000 you get reduced from your taxable salary that helps save tax.

L&T Infrastructure bonds to list on NSE after 5 years

The Bonds are proposed to be listed on NSE, and can be traded after the initial 5 years lock-in period. After this lock-in period, the holders can also pledge the Bonds with banks for availing financial assistance.

You don’t need a demat account to invest in these bonds

L&T will offer you the option to hold the Bonds either in Dematerialized or Physical Certificate form.

NRIs can’t apply in the L&T Bonds

Non-resident investors including NRIs, FIIs and OCBs are not eligible to participate in the Issue.

Conclusion

These were some salient features of the L&T bond issue, and I hope you found this useful in order to make a decision on whether you want to opt for them or not. Keep in mind that IDFC has a similar issue running, and if you have already applied for that then you won’t get any additional tax benefit (over Rs. 20,000) by applying for this issue as well.

If you have any questions, leave a comment, and the community here will try to answer them for you.

Click here to read about the IDFC bond issue

Click here to read about the SBI bond issue

Like the IDFC bonds post, there have been several comments and a bit of a discussion going on in the comments section of the SBI Bonds post as well, so I thought I’d take some of those questions and make a SBI bonds FAQ post here.

Listing with a premium

There was this interesting discussion about the bond listing at a premium and I myself know absolutely nothing about this, so I will paste Monu’s original theory and question, and then Arun’s response to it verbatim. Thanks to both of you for bringing this out!

Monu October 15, 2010 at 5:23 am

Whether the Bond will list at a premium because as per Bond Valuation theory Bond Value is a function of interest rate. So they are offering 9.5% which is 2% higher than the rate offered on FDs by Banks so we will get 2% higher for 10 years, which if we discount it @7.5% we will see its present value comes to around Rs 14 per 100. So I expect the bond to list @ 14% premium. So can anyone advise me whether I am write or wrong, because I have never invested in Nonds before.

REPLY

Arun October 15, 2010 at 7:12 am

Hi Monu,

Your basic logic is correct. However FD are covered under deposit insurance while these bonds are not and this makes bonds more risky thus coupon rate has to be higher. In my opinion you will not get more than 2-3% listing gain on these bonds. Same happened with Sriram Transport NCDs (new ones) in May.

Arun

Maximum retail subscription and over – subscription

There is a lot of excitement around these bonds, so I won’t be surprised if they get over-subscribed on the first day itself. So, I thought Sameer asked a very good question about over-subscription. Here is that discussion.

Sameer October 16, 2010 at 3:57 am

I understand the retail category applicants can apply for max. Rs 5 lakh. Now if I apply for Rs 5 Lakh on the 1st day , will I qualify for the first come first serve rule to be followed for allotment.

REPLY

Manshu October 16, 2010 at 4:23 am

That’s a good point. The bond is reserved 50% for retail, 25% for HNI and 25% for Corporates etc. If one category is left under-subscribed then their quota will be allocated to Retail, HNI and Corporate in that order.

If there is over-subscription – then from the applications received on the day of over-subscription – preference will be given to Series 2 Lower Tier II Bonds on a first come first serve basis, and balance will be allotted on pro-rata basis to Series 1 Lower Tier II bonds.

The relevant part is in page 160, 161 in the prospectus under Basis of Allotment, Issue structure for those of you interested in reading through it. And if anyone else has heard any different then let’s hear it.

Here are some other questions that you may find useful.

Can I trade the SBI bonds on NSE after it lists?

Yes, these can be traded after listing.

Where can I get the application forms, and can I buy the bonds online?

You can get the application from notified branches, and then fill it up there and submit it. To the best of my knowledge, there is no way to invest in them online, but if anyone knows otherwise then please leave a message, and let us know.

Can NRIs apply for these bonds?

NRIs can’t apply for these bonds as they fall under one of the ineligible categories.

Can you take a loan by keeping the SBI bonds as security?

The terms of the issue in the prospectus state that the bank shall not grant any loans against these bonds. Here is what it says:

In accordance with the RBI guidelines applicable to the Bank, it shall not grant loans against the security of the Bonds.

Will the interest from these bonds be taxable?

Yes, the interest income will be taxable.

These were some good points that came out from the comments on the earlier SBI bonds post, and if you have any more questions, then let’s hear them and try to get answers for them.

Click here to read the earlier review of SBI bonds

Click here to read the review of the IDFC bonds

Click here to read about the latest bond issue which will open on February 21st 2011.

SBI Retail Bonds are the latest offering from SBI which is coming up with a bond issue that opens on 18th October and closes on 25th October. This is the second big bond issue this month with the IDFC issue still running.

A lot of people will be comparing the SBI bond issue to the IDFC one, so let me say upfront that they’re quite different in one key aspect which is the tax savings. The IDFC bond issue was an infrastructure bond under Section 80CCF, and could get your taxable income reduced by up to Rs. 20,000.

The SBI retail bonds are not covered under this, so you won’t get any 80CCF benefits. Now let’s look at some of its main features.

Interest rate on SBI Bonds

There are two series of SBI Bonds – Series 1 Lower Tier II Bonds gets you an interest rate of 9.25%, and has a tenor of 10 years, and the Series 2 Lower Tier II Bond has an interest rate of 9.50%, and a tenor of 15 years.

This compares quite favorably to the fixed deposit rates SBI offers as the SBI fixed deposit interest rates for 5 – 8 years is 7.50%, and more than 8 years is 7.75%. These bonds are not covered under deposit insurance since they are not fixed deposits, and are not redeemable at the option of the bondholders.

There is a call option or redemption with SBI according to which they can redeem the series 1 bonds after 5 years, and series 2 bonds after 10 years. If they don’t do that then the interest rate will rise by 0.50%.

Demat account is compulsory for investing in SBI Bonds

You need a demat account to invest in these SBI bonds, and your bonds will be held in dematerialized form. If you don’t have a demat account and wish to invest in them then you will have to open a demat account fairly quickly.

Tax implications of the SBI Retail Bond

SBI Retail Bonds are different from the IDFC bonds in the sense that they are not covered under section 80 CCF, so there won’t be any reduction from your taxable income because of investment in this bond.

The interest from these bonds will be treated as income that gets added to your other income and you will pay tax on it accordingly.

SBI Bonds to be listed on NSE

These bonds will be listed on the NSE, and as far as I could understand you will be able to freely trade the bonds even within the 5 year period. So you could hold the bond till maturity or sell it on the exchange if a market develops for it. The prospectus states that all formalities to list the bond will be completed within 30 days of date of closure, so the bonds will be listed on the exchange to buy and sell fairly soon.

When will the interest be paid on the SBI bonds?

The interest on both the series of SBI bonds will be paid out on April 2 of every year.

What is the minimum application size on the SBI bond?

The minimum amount you need to invest in these bonds is Rs. 10,000, you can subscribe in multiples of Rs. 10,000 after that.

How do these SBI Retail Bonds compare with fixed deposits?

Quite favorably because of the higher interest rate and option of listing on NSE. People are expecting these retail bonds to over-subscribe, so let’s see how it goes.

These were some important points about the SBI retail bonds that’ll help you make a decision whether they are right for you or not. If you have any other questions, please leave a comment, and I’ll try to answer them.

Click here to read about the latest bond issue which will open on February 21st 2011.

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

The IDFC Infrastructure Bond post has thrown up some interesting questions from readers which were not part of the post itself, and while I am replying to them in comments – I thought I’d do a fresh post with 5 questions that I thought deserved a post of their own.

1. Is opening a demat account compulsory for investing in the IDFC Infrastructure bonds?

No, it is not.

When this scheme opened there was just the option to invest in it if you had a demat account, but some changes have been made (pdf) and opening a demat account is not compulsory now. You can buy them in physical form also. Their website tells you how to do this.

You can also subscribe to the Bonds in physical form by following these simple steps:

• Don’t fill up the demat details in the application form
• Compulsorily provide the following three documents with the application form:
  • Self-attested copy of the PAN card;
  • Self-attested copy of a cancelled cheque of the bank account to which the amounts pertaining to payment of refunds, interest and redemption, as applicable, should be credited.
  • Self-attested copy of the proof of residence. Any of the following documents shall be considered as a verifiable proof of residence:
    • Ration card issued by the Government of India; or
    • Valid driving license issued by any transport authority of the Republic of India; or
    • Electricity bill (not older than 3 months); or
    • Landline telephone bill (not older than 3 months); or
    • Valid passport issued by the Government of India; or
    • Voter’s Identity Card issued by the Government of India; or
    • Passbook or latest bank statement issued by a bank operating in India; or
    • Leave and license agreement or agreement for sale or rent agreement or flat maintenance bill; or

Letter from a recognized public authority or public servant verifying the identity and residence of the Applicant.

2. Is the interest earned from the IDFC Infrastructure bond tax-free?

While IDFC Infrastructure bonds may not attract TDS – the interest itself is not tax – free. It’s only the Rs. 20,000 you get reduced from your taxable salary that helps save tax.

3. Has the closing date to invest in IDFC Bonds extended?

Yes, the closing date has been extended from 18th October to 22nd October.

4. When do the bonds start trading in the stock exchange?

After the initial lock – in period of 5 years is over, the bonds will list on the NSE and BSE, and start trading there.

5. Which option has the highest yield?

Yield table from the website. Now keep in mind this is just the yield, the lock in periods differ between various series, and that needs to be taken into account while making your decision, however since my earlier post didn’t have this yield table I am including it here.

Click here to read the earlier review of the IDFC Infrastructure Bond.

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.20,000  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 PRIVATE  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 : IDFC_StockBroking@idfc.com
Website : www.idfc.com

Call : 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.

Click here to read about the Coal India IPO