What are Infrastructure Bonds and How do they help to save Tax

Dear Tax-Payers,

Again, the calendar hits the December month, and is the time to submit proofs of all the investments made by you to ensure that the tax dedecuted from your salary by your employer takes into consideration for tax exemption.

As everyone knows, An Individual is eligible for tax exeemption upto Rs, 1,00,000 u/s 80C. Infrastructure bonds are good option for those who are looking for saving more tax, Since it provides a facility of additional tax exemption upto Rs, 20,000 u/s 80CCF, which is additioanl to regular 1,00,000 u/s 80C.

What is Infrastrucre Bond?

Infrastructure bonds are long term investment bonds issued by any non banking financial company like IDFC, IFCI or L&T, PFC, REC. These companies collect money from wide range investors and these proceeds are being funded towards government infrastructure projects like hydro power projects, ports, power plants etc.

What is Infrastructe Finance Company?

Till 12-Feb-2010 the Reserve Bank of India used to categorize Non Banking Financial Companies in 3 categories:

1. Asset Finance Companies
2. Loan Companies
3. Investment Companies

NBFC also engaged in financing infrastructure projects, proposed to the RBI that there is a need for a separate category of infrastructure finance NBFC. After proper analysis, RBI thru its circular on 12-Feb-2010, introduced a fourth category of NBFC as "Infrastructure Finance Companies" (IFC).

How to apply

Every citizen of INDIA can invest in Infra bonds. Ofcourse, Non-Resident Indians can't have this facility.

During September - March, Infrastructure Finance Companies like IFCI, IDFC, L&T, PFC, REC announce the issue of Infrastructure bonds through all the media like Newspapers, Magazines and Televisions.

There are two opitions to invest in Infrastructure Bonds,
1. Physical Form
2. Demat Account

Currently Industrial Finance Corporation of India (IFCI) is offering such bonds – IFCI offers infra bonds with an interest rate of 9.09% and 9.16% per annum. IFCI bonds are rated as 'AA-'' by Brickwork Ratings India Pvt. Limited, 'A+' by CARE, (Credit Analysis & Research Ltd.), 'LA' by ICRA Limited.

Issue Open Date for IFCI : 30-Nov-2011
Issue Closing Date for IFCI : 16-Jan-2012

Toll Free Number for IFCI Infrastructure : 1800-34-54001

For Physical form, You need to call the customer care number and ask to send the executive from the respective Infrastructure Company to receive the duly filled in applicaiton form from you. In case, You don't have an application form, He can even provide you the applicaiton forms for free of cost.

OR alternatively, You can download the applicaiton form from the respective websites and fill them up and drop them at the nearest branches or their authorized collection centeres.

For Demat form, You can simply logon to your Trading Account and buy the Infrasture bonds and you will get the bond in dematerialized form into your Demat account. You can also request for the physical form as well. For any help on this, You can either call your share broker or infrastructure company customer care.

Documents required ?

In case of Physical form of applications
Documents required are
1. Duly filled application form
2. Cheque (A/C Payee) / DD towards the invested amount in the name of the Infrastructure company.
3. Xerox copy of PAN Card
4. Xerox copy of Address proof

If you opt for Demat form, You can directly invest in infrastructure bonds from your trading account just in a click away.

Investment & Tax Benefit

Investment in infrastructure bonds makes sense for all tax payers considering the nice post-tax returns. But investments of up to Rs 20,000 per tax payer qualify for income tax deductions. Beyond that, there will be no tax exeemption.

Since, Investors are directly helping in nation development, as the IFC are funding the invested money towards government infrastructure companies, RBI has provided an additional advantage of tax benefit under the 80CCF 1981 upto Rs. 20,000. This exemption is in addition to Rs 1,00,000 exemption under section 80C.

What is the tenure and returns after maturity ?

As mentioned above, Currently IFCI comes up with two schemes, one with 10 years of maturity and other with 15 years of maturity period.
Both schemes with a minimum lock-in period of 5 yeas from the date of allotment. The deemed date of allotment would be February 15, 2012.

Face value of each Bond is Rs. 5000. Minimum investment will be Rs. 5000, i,e. 1 bond. IFCI offer a buyback facility after 5 and 7 years tenure. And the interest rate will be payable either annually or cumulative basis.

At the end of 5 years, For 10 year maturity bonds, IFCI can buy-back at Rs. 7724.94 (on cumulative interest option) and For 15 year maturity bonds, IFCI can buyback at Rs. 7749.75.

What about the post-tax benefits from these bonds?

The post-tax returns in both cases comes around 10.85% (for those in the 10.30% tax slab ), 13% (20.60% tax slab), and 15.56% (30.90% tax slab). The returns are really good. Assuming that you will use the buyback facility provided by the company at the end of five years and that the tax rate will remain constant throughout the five-year period.

Any other company offers higher interest rates than 9%?
Natural question arises to every investor, nothing wrong, IFC Companies offer interest rates on the bonds based on their returns and also compares the current rate of interest on government securities for the tenure of the bonds before the issue of the bonds. Based on the last year's experience where those who waited till the last minute got better interest rates, But, no guarantee that, It always becomes true, Sometimes, You may get even less interest rates at later point of time with next issues. Now, IFCI is offering at 9.09% for 10-year maturity bonds and 9.16% on 15-year maturiry bonds.

Just for your information, In the month of December, L&T and IDFC companies issued the infrastructure bonds at intrest rate of 9%. I suggest you not to wait for another company to announce for the issue of their bonds at the higher interest rate. The rates may go up or down in furure.

For Whom, Infrastructure Bonds are suitable? and Whether to opt for buy-back option or not ?

The highest tax payers regardless of age bracket can invest in these plans. These bonds have a maturity period of 10 to 15 years. After say 5 years one can use the option of buy back or he can always enjoy the interest annually or compounded interest at the end of the period. You need a pan card, address proof and demat account to apply.

Another interesting question is whether you Should opt for the buyback option after five years or wait till the five-year lock-in period is over and then decide whether to continue with the bond for a further period or opt for the buyback option? Generally, It is suggested to continue for longer period, unless you need your investment back after 5 years, alternatively, you can also invest your matured amount again into the same infrastructure bond, and can get the tax benefit again for that year.

On ther other side of the coin, It might be a loss to your capital, if you continue with the bonds at the end of five years and if the interest rates for such bonds is higher than 9% at that time. I would go for buyback option while applying for the bond so that my returns are locked in.

Are you ready for investing?

If you have decided to invest now, Decide whether to go for 10-year maturity or with 15-year matuity. But, both have a buy-back facility after 5 years time.

Conclusion

Infrastructure bonds are the good option for getting additional tax savings for investments upto Rs. 20,000 u/s 80CCF which is in additional to Rs. 1,00,000 regular deductions u/s 80C, and one can shoose the buyback option while applying for the bonds. Investors can enjoy the post-tax returns of 10.85% (for those in the 10.30% tax slab ), 13% (20.60% tax slab), and 15.56% (30.90% tax slab).