With the year coming to an end, it is time to invest for saving your income tax. And companies leave no stone unturned to seize this opportunity to raise funds through tax-saving long term infrastructure bonds. Currently, Infrastructure Development Finance Company (IDFC) and L&T Infrastructure Finance, both engaged into infra lending business, are running two retail issues offering 9% rate of interest per annum.
Bond issues at a glance:
| Company | Ratings | Interest rate |
| IDFC | AAA | 9% |
| L&T Infra | AA+ | 9% |
| PFC | AAA | 8.50-8.75%* |
| IFCI | AA- & A | 8.50-8.75%* |
*Issues already closed
What are long term infrastructure bonds?
These are debt instruments wherein an investment upto Rs 20,000 is eligible for individual income tax benefits under section 80CCF. This is over and above the normal limit of Rs 1 lakh investments.
Should you invest?
Experts across the board recommend it as a prudent investment. However, you should keep in mind certain key factors while investing.
�Do not just invest for the sake of tax saving only,� Sumeet Vaid, CEO and founder, Freedom Financial Planners, a Mumbai based advisory firm.
�Tax is a temporary objective. Think of your long term goals for five to ten years. In this instrument, you should invest only a portion, maybe 50%, of your total debt allocations in the entire investment portfolio.�
Issuers generally set a maturity period of ten years for their infra bonds. However, those carry a lock-in period of five years. After that, investors can exercise the put option wherein the issuer will buy buck bonds from them at par.
Moreover, investors can also sell those bonds in the secondary market as bonds get listed in the stock exchange(s) � BSE and NSE.
Is liquidity a concern?
�Liquidity is an issue for infra bonds when they are traded in the secondary market,� Arvind Konar, head � fixed income, Almondz Global Securities told Moneycontrol.com.
�Traders hardly take any interest to trade bonds with a tiny amount of Rs 20,000. Investors should exercise the put option if any other company offers higher interest after five years. However, they should hold it till maturity in case of any fresh offering with lower rates.�
Advisors agreed to the fact that investors should not seek liquidity from a tax-saving instrument. Rather, a set of liquid instruments like stocks and different mutual fund schemes are available in the market.
Rating or brand?
While IDFC issue carries AAA rating by rating agencies, L&T Infra issue is awarded with AA+ rating. This however, would not necessarily be a major trigger for your investment decision.
�If there is a huge difference in ratings, then only, you take a call based on that. However, any slight variation in ratings would not matter. If you have trust in any particular brand, you stick to that brand only, irrespective any rating,� Amar Pandit, director, My Financial Advisor, adding that technically, a higher rating makes a case for better investment.
Interest payment mode: annual or cumulative?
Go for cumulative interest payment! In case of annual interest income, according to Konar, the reinvestment options are limited. It is always better to avail the power of compounding interest.
More such bond issues are expected in the coming two months. In case of long term infra bonds, a company cannot offer any interest rate that is higher than the yield of 10-year government bonds, pegged at 30 days prior to the launch. Roughly, here an investment of Rs 20,000 will fetch tax exemptions anything between Rs 6,200 and Rs 2,000 depending on tenure and income tax slabs (including 30.90%, 20.60% and 10.30%).
saikat.das@network18online.com
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