Infrastructure Bonds: To Invest or Not - An Analysis

Most of us are not much aware about our tax planning and ends up with some tax saving investment with poor return at the last moment. So it’s important that you know about the options available for our tax planning. For tax planning we Have limit of 1 lac above 1.8 lacs limit from the govt. For this saving we invest in some of the tax saving instruments Like PF, PPF, ELSS, Life insurance, Pension, NSC, 5-year Bank FD, etc.

Apart from this govt has provided us an option of having tax saving above 1 lac limit in form of investment in Infrastructure Bonds up to 20,000 under Sec. 80 CCF. So we have this option available to save our taxes. But most of us are not sure if these infra bonds are worth investing. Here is an analysis after which you can decide if it’s for you or not.

I have taken example of IDFC Infrastructure bond for this analysis. This issue is available from 21^st Nov- 16^th Dec 2011. Key features of this Bond are as follows..

IDFC Infra Bonds: Issue Highlights

Issue opens:	Monday, November 21, 2011	Interest Rate:	9% p.a.
Issue closes:	Friday, December 16, 2011	Tenor:	120 months from the Deemed Date of Allotment
Issue Price:	Rs.5000 per Tranche 1 Bond	Rating:	"(ICRA) AAA" from ICRA "Fitch AAA (ind)" from Fitch
Listing on:	NSE and BSE	Issuance:	Dematerialized form or Physical form.
Issue Type:	Long Term Infrastructure Bond	Tax Benefit:	Additional tax benefits of Rs 20,000/-Over and above the permissible deduction of Rs.1 lakh under Section 80 C
Registrar:	Karvy Computershare Private Limited

SPECIFIC TERMS FOR EACH SERIES OF BONDS

Particulars Series 1 Series 2 Frequency of Interest Payment Annual Cumulative Buyback Facility Yes Yes Buyback Amount Rs. 5,000 per Tranche 1 Bond Rs. 7,695 per Tranche 1 Bond Buyback Intimation Period The period beginning not before nine months prior to the Buyback Date and ending not later than six months prior to the Buyback Date Tenor 120 months from the Deemed Date of Allotment Interest Rate 9% p.a. (Series I) N/A Minimum Application 2 Bonds and in multiples of 1 Bond thereafter Maturity Amount Rs. 5,000 per Tranche 1 Bond Rs. 11,840 per Tranche 1 Bond Yield on Maturity 9% 9% compounded annually Yield on Buyback 9% 9% compounded annually

These bonds are rated AAA by ICRA and are considered as stable ones. Now if you consider the actual return of these bonds. The returns are as follows for the investment of INR 5000, which gives you INR 7695 after 5 years.

	TAX SLAB
	I - 10%	II - 20%	III - 30%
Tax saving	500	1000	1500
Actual Return	2695.00	2695.00	2695.00
Actual investment	4500.00	4000.00	3500.00
Percentage return( Before Tax)	11.33	13.98	17.07
Tax on interest received	269.50	539.00	808.50
Return After Tax	2425.50	2156.00	1886.50
Percentage return( After Tax)	10.54	12.34	14.49

These are the calculations based on the fact that we are using the buying back option after 5 years. So by using this option it makes sense to invest 20k in this infra bond. Because it’s giving you the effective return of 10- 14.5% respectively for 10-30% tax bracket folks.

Some Cons-

1. Strict lock-in period (at least 5 years till buy back option).
2.  Even if a bond gets listed on the exchange, the liquidity will be poor. That is, when you want to sell your bond and get the money it "may" be difficult to find a buyer.
3. Buyback option is not available in all bonds offered. Hence be careful before you invest.
4. Interest earned is taxable.

My Take- It’s more beneficial for folks falling in tax bracket 20-30% and who are ready to get invested at least 5 years. So take the decision carefully. Happy Investing :)