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Wednesday, October 19, 2011

Should you invest in Infrastructure Bonds? – a guest post

Have you started investing regularly to avail of the various income tax benefits, or are you like most investors who leave their tax saving investments till the third week of March every year?

In this month’s guest post, Nishit suggests a tax saving investment that is not that well-known or well-publicised, but can provide quite decent returns.

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Diwali is just a week away. Many of us will be getting Diwali bonuses. What do we do with the money instead of blowing it up? Tax season is still 6 months away but it pays to plan early. There is an interesting Infrastructure Bonds issue of which not much is known about. Organisations like IFCI, LIC, REC, IDFC, IIFCL, SBI, ICICI, L&T have been allowed to issue these bonds.

This is the second year when the Government has permitted investment in Infrastructure Bonds of specified companies with tax benefits, subject to a tax exemption ceiling of Rs 20,000. This comes under Section 80 CCF, over and above the Rs 100,000 that can be tax exempt under section 80C. The bonds have a face value of Rs 5000, and can be bought by resident Indians and HUFs.

Power Finance Corporation has come out with a bonds issue with tenures of 10 years and 15 years. These bonds have a lock-in period of 5 years after which you can sell them on the Bombay Stock Exchange, where they will be listed in demat form. There is an option to hold the bonds in physical form too.

The 10 year bonds have a coupon rate of 8.5%, with two options of interest payments - either Annual or Cumulative. The 15 year bonds come with a coupon rate of 8.75% and with same two options as the 10 year bonds. The interest income on the bonds is taxable (under ‘Income from Other Sources’) but no TDS will be deducted.

Now, should one invest in them?

Assuming one holds them for 5 years, and gets a one-time tax benefit of Rs 6,180 in the highest tax bracket, a simple back of the envelope calculation shows one effectively saves Rs 1,236 per year. That works out to a ‘yield’ of 6.18% in addition to the coupon rate of 8.75% for a 15 years bond, which is equivalent to a pre-tax return of nearly 15%.

The above calculation assumes that one exits after 5 years and gets a similar tax break. The yield could be higher or lower depending on your tax bracket. Of course, one could continue holding till maturity of 10 or 15 years.

The bonds are secured against the immovable property of the company and PFC is a government Navratna - thus making it a very a safe investment. Whichever way one looks at it, PFC’s Infrastructure Bonds are a good investment because of the AAA rating, tax benefits, and the decent rate of interest. The bonds are open for subscription till Nov 4, 2011.

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(Nishit Vadhavkar is a Quality Manager working at an IT MNC. Deciphering economics, equity markets and piercing the jargon to make it understandable to all is his passion. "We work hard for our money, our money should work even harder for us" is his motto.

Nishit blogs at Money Manthan.)

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