Buy Infrastructure bonds and save up to Rs 6,000 tax

Taxes | admin | November 4, 2011 at 5:55 am

Most of you must be recovering from the excesses of festivities. It is, therefore, hardly time to discuss tax planning. However, the trouble is that your employer would ask for your final tax-planning details in less than a month. If you want to avoid the last-minute rush, it is time to start giving final touches to your tax-saving attempts.

If you were planning to invest in the newly introduced infrastructure bonds, you can consider the issues of IFCI and PFC that are open for subscription. As you know, investment up to 20,000 in these bonds qualify for tax deduction under section 80CCF. By investing 20,000 in these bonds, introduced just last year, an individual in the highest tax slab can save tax of 6,180. This is in addition to the 1 lakh you can invest under Section 80C.

"Since the investment limit under Section 80CCF is separate from the Section 80C, investors should utilise this limit. Even if you miss these issues, make sure you invest in the subsequent issuances," says Anup Bhaiya, MD and CEO, Money Honey Financial Services. Distributors say such bond issues are expected from IDFC and L&T Infrastructure later in the financial year.

The similarities

Both the IFCI and PFC issues have many things in common. In both the cases, the 10-year bonds pay an annual interest rate of 8.5% per annum, while the 15- year bonds pay an interest of 8.75% per annum. If you are investing 5,000 under the cumulative option of any of these bonds for 10 years, you would get 7,519 at the end of the term; invest the same amount for 15 years and you get 8,995 per bond.

The minimum investment is for one bond with a face value of 5,000. You can buy in multiples of 1. Both the issues provide the annual and cumulative options of interest payment for both maturity tenors. You can opt to invest in the physical form or the demat form. If you are applying in the demat mode, you need to provide details of your demat account along with a copy of your Permanent Account Number (PAN) card, along with a cheque. If you are investing in the physical form, you need to attach a copy of your residence proof as well. There is a buyback option at the end of five years from the date of allotment. The bonds will be listed on the stock exchange once the mandatory lock-in period of five years is over, offering liquidity.

There are differences, too

In terms of financials, PFC has a larger balance sheet than IFCI. IFCI, on an income of 2,486 crore, has clocked a net profit of 706 crore for the year ended March 2011. On the other hand, PFC clocked a net profit of 2,620 crore on an income of 10,161 crore. However, the major difference in both the bonds is the credit ratings. While PFC bonds have been assigned a rating of 'AAA/stable" by Crisil and 'AAA' with a stable outlook by Icra, IFCI bonds have been assigned 'BWR AA-' by Brickwork Ratings India, 'CARE A+' by CARE (Credit Analysis and Research) and 'LA' by Icra.

There is a small difference in the rate of interest rate paid in the period between an investor submitting an application and the allotment of bonds. While IFCI will pay the coupon rate of 8.5% as interest rate on the application money, PFC will pay 5% interest on the application money.

In addition to the ratings, there are differences in the buyback option as well. Both PFC and IFCI bonds offer a buy-back option under which investors can sell the bonds back to the issuer after the mandatory lock-in period of five years. If the interest rates are rising, this is beneficial to investors as they can sell their old bonds and subscribe to new bonds at a higher interest rate. However, the time period after which investors can tender their bonds is different in the two issues.

In the case of the PFC bonds, you can sell back 10-year bonds at the end of five years; 15-year bonds can be sold back to the company at the end of seven years. In the case of the IFCI issue, investors can sell back the bonds at the end of five or seven years for 10-year bonds, and at the end of seven, 10 or 12 years for 15-year bonds.

Invest in one or use a combination?

Most infrastructure bond issuances are issued by either government organisations or companies in the private sector with a very high rating.

The interest rate on infrastructure bonds is driven by government directives and issuers do not have the flexibility to fix their own rates.

As per a government notification, "The yield on the bonds shall not exceed the yield on government securities of corresponding residual maturity as reported by FIMMDA, as on the last working day of the month immediately preceding the month of the issue of the bonds."

IFCI's issue opened in September and the yields for 10-year government securities at the end of August were in the range of 8.50%. Subsequently, 10-year yields have moved up to levels of 8.76%, an increase of 25 basis points. Hence, subsequent issuers could offer marginally higher interest rates.

Choosing from the current offerings

Both IFCI and PFC offer the same rate of interest, but PFC commands better ratings than IFCI. Higher the ratings, the more safe your investments will be. Hence, PFC scores on the rating front, while IFCI scores marginally on the buyback front. "There is little to choose between the two and, hence, investors can go with an issuer they are comfortable with," says Anup Bhaiya.

However there are some who feel you could split your investments in the two issues. "There is a chance that future issues from the likes of L&T Infra and IDFC could offer slightly better interest rates of about 25 basis points," says Deepak Panjwani, head – debt market, GEPL Capital.

However, it is difficult for investors to time the market. His advice to investors is to invest 20,000 under Section 80CCF in two phases. While they could invest 10,000 right away in PFC, the balance 10,000 could be invested in the issues of L&T Infra or IDFC at slightly higher rates. However, everyone doesn't subscribe to the theory.

"The amount is too small to really split up. Moreover, tracking two investments will be tedious over a period of time. Investors should go for an issuer s/he is comfortable with," says Anil Chopra, group CEO, Bajaj Capital.

Source: Economic Times

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