Comparison of infrastructure bonds to find out the best to save tax.
Infrastructure bonds are making a splash these days just in time before the end of the tax-saving season in March. Currently, issues are open for subscription from Infrastructure Finance Corporation of India (IFCI), Rural Electrification Corporation (REC), PTC India Financial Services and SREI Infrastructure Finance. IDFC has already raised Rs 533 crore through its issue of infrastructure bonds which closed for subscription in December 2011.
The company is likely to come up with its next tranche of these bonds soon. You can invest up to Rs 20,000 in these bonds and claim tax deduction under Section 80CCF. If you are in the highest tax bracket, you can save as much as Rs 6,180 by investing in these bonds.
“The Rs 20,000 limit for investment in infrastructure bonds is in addition to the 1 lakh tax deduction limit available under Section 80C and hence merits investment. You can choose an issuer of these bonds based on the credit rating, interest rates offered and the financial credentials of the company”, says K Ramalingam, director and chief financial planner, Holistic Investment Planners.
The common elements
All issues have tenures of 10 years and 15 years. There is a buy-back option at the end of five years from the date of allotment, and liquidity will also be offered by listing the bonds on the stock exchange once the mandatory lock-in period of 5 years is over. While the buy-back facility for the 10-year bonds is after 5 years, for the 15-year option it comes after 7 years. All of them provide annual and cumulative options of interest payment for both maturity tenures.
You can choose to apply for only the 10-year bonds or only the 15-year bonds or a combination of the two. If you have a demat account you can apply in the demat mode, else you can even opt for physical certificates. 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. However, if you are looking to invest in physical form, you need to attach a copy of your residence proof as well.
The face value of each bond is Rs 5,000 and one has to make an application of one bond and in multiples of one bond thereafter. There is no upper limit on the amount you can invest. Only in the case of SREI Infra, the face value is Rs 1,000 and one can apply for a minimum of one bond.
Choosing one over the other
The issues on offer differ in interest rates, ratings and buy-back options after the lock-in period. IFCI pays the highest interest amongst all of them. For a 10 year period, IFCI pays 9.09% while REC pays 8.95%, PTC India Financial pays 8.93% and SREI Infra Finance pays 8.9%. For the 15 year tenure, IFCI pays 9.16% while all others pay 9.15%. While REC and IFCI are owned by the government, PTC India Financial Services parent – PTC, is a government promoted public private partnership and SREI Infra is a private player.
In terms of ratings, REC scores as it has an AAA rating which indicates highest degree of safety in terms of timely repayment of principal and interest. As compared to this, IFCI, PTC India Financial Services and SREI Infra have a lower rating.
IFCI bonds enjoy a ‘BWR AA-‘ by Brickwork Ratings, ‘CARE A+’ by CARE and ‘LA’ by Icra. PTC India Financial Services has been assigned an ‘A+’ rating by CARE and ICRA. SREI infra bonds enjoy a rating of CARE ‘AA’.
“Since REC and IFCI are owned by the government, the margin of safety is high. Investors could choose from either of the two,” says Rajendra Routela, director, RR Investors. For those who are ready to split the amount in two issues, there is another strategy. “If you want the best of high rates as well as high rating, invest Rs 10,000 in the 10-year option of IFCI at 9.09%, and Rs 10,000 in the 15-year option of REC at 9.15%. With this you get the highest rates a well as highest safety”, says Deepak Panjwani, head-debt markets, GEPL Capital. However, not all financial planners would advise you to split investments since the amount of 20,000 is small and would make it difficult to track over a 5-year period.
“If you prefer simplicity, restrict yourself to one issuer and invest the entire Rs 20,000 there”, says Srikanth Meenakshi, founder, fundsindia.com. Finally, even if you are short of funds and cannot invest right now, do not lose hope. “There will be multiple issues right till the end of the financial year and you can invest in any of them when you have liquidity”, says Deepak Panjwani.
Invest only Rs 20,000
Many investors do feel that it is a tedious process to invest in these bonds. One, the amount is too small and they are locked in for a period of 5 years. Over a period of five years, you may have multiple series of bonds from multiple issuers which would make tracking difficult. However, investment experts feel this could mean you end up losing an option to save Rs 6,180 in taxes every year, assuming you are in the highest tax bracket.
“Infrastructure bonds are the only products available under Section 80CCF and hence investors would do well to take advantage of this and save tax”, says Rajendra Rautela. However, experts advise against investing more than Rs 20,000, as the interest income here is taxable. So if you are in the highest tax bracket, a return of 9% would translate into a post-tax return of 6.24%. As against this, tax-free bonds from public sector units like NHAI and PFC would give you 8.3%. If your income is not taxable, bank FDs may offer you slightly higher returns with better liquidity.
Source: Economic Times