Infrastructure Bonds India

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From the 2012-13 fiscal onwards the infrastructure bonds will not provide tax benefits. The tax benefit had been extended till 2011-12 and experts had asked that the tax exemption limit be increased.
However, the Union Finance Ministry did not touch upon the infra bonds in the latest bonds and opted to completely do away with the tax benefits being granted previously.

This is expected to have a negative effect on the infrastructure companies as these bonds helped them generate working capital at low interest. Now, with the removal of tax benefits their sale will surely come down. They might even need to avail loans at higher rates of interest.

The condition of Indian infrastructure is fairly weak and analysts wonder if this ruling will help the entire scenario in any way.

Background of the ruling
The Union Finance Minister Pranab Mukherjee had staged a pre budget meeting with financial institutes and banks representatives whereby the banks had asked permission to provide infra bonds that qualified for tax benefits. The participants also stressed on why investment in this sector needed to be incentivized. They also asked that the exemption limit be raised from INR 20,000 to 50,000.

Previous scenario
As per the Section 80CCF of the Income Tax Act of India, the tax payers in the highest category could save up to 6180 rupees with infrastructure bond investments. Interested investors can purchase these bonds through their demat accounts or bond arrangers, in case they lack demat accounts.

Highest amount for investment in infra bonds
The Indian tax payers were provided the opportunity to put their money in these bonds for the first time in the 2010 Union Budget. Tax laws state that no investor can put in more than 20,000 in order to be considered eligible for tax deductions. This is an addition to the Section 80C maximum limit of INR 1 lakh.

Eligible infrastructure bonds as per Section 80CCF
The 2010 budget did not make spell out clearly which bonds will be regarded eligible for tax deduction. The Indian government though used to keep interested investors apprised of the situation with regular updates in this regard.

Normally bonds issued by public sector organizations and government owned set-ups were regarded to be fit for such exemptions under the Section 80CCF. Earlier, only the governmental organizations enjoyed the privilege.

Infra bond details
The money generated through these bonds was used to create important structures like roads, ports, airports, and power plants. The long term nature of investment meant that they are available in maturity periods of 10 and 15 years. However, an investor cannot ask for tax exemption if he or she has not invested for a period of at least 5 years.

Normally, the public sector organizations offer better interest rates compared to the governmental entities. As per laws, interest earned from these bonds will be subjected to taxes just like the fixed deposits that offer tax benefits. This means that their actual return varies from anywhere between 5 and 8 percent.

This means it is slightly less advantageous than other investment options such as PPFs, NSCs, and fixed deposits in that regard. The fact that infra bond investors are not secured against inflation accounts for the variable returns as well.

This is also a major reason why various tax payers have different earnings from the same infra bonds. These bonds are normally issued at different times in a year. Liquidity can often been a thorn in the investors side but experts say that since they are issued several times a year they can avail these opportunities at their convenience.

The analysts say that it is safe to put in not more than 20,000 in these bonds for the same reason. Investors can sell back their infra bonds or sell it in the financial markets once the starting period of 5 years is over.

Top Infrastructure Bonds

Following are the best infra bonds in India:
  • IDFC Infrastructure Bonds
  • L&T Infrastructure Bonds
  • IDBI Flexibonds
  • IIFCL Long Term Infrastructure Bonds
  • IFCI Infrastructure Bonds
  • ICICI Safety Bonds
  • REC Tax Saving Infrastructure Bonds
Right now, IFCI is providing the best in terms of interest rates with 9.09% for its 10 years bonds and 9.16% for the 15 year infra bonds. REC investors can expect a rate of 8.95% for the 10 year bonds, PTC India Financial investors will receive 8.93% for the same bonds, and for the SREI Infra Finance investors the rate is 8.90%. The rate for 15 year bonds for the three companies is 9.15%.

REC enjoys a credit rating of AAA, which implies that it offers the most security for its investors especially in factors such as timely repayment of principal and interest. Following are the ratings details of some other infra bond issuing organizations:

  • IFCI - AA- (from Brickwork Ratings), CARE A+ (from CARE), LA (from ICRA)
  • PTC India Financial Services - A+ (from both CARE and ICRA)
  • SREI - AA (from CARE)
Experts think that investors get the maximum security from REC and IFCI as they are government owned.

IDFC Infra Bonds

  • Interest rate - 8.70%
  • Eligible for maximum tax benefit of INR 20,000
  • AAA rating by ICRA and Fitch
  • Lock in period - 5 years
  • Can be sold at both NSE and BSE after lock in period
How to choose infra bonds
At the least, an investor needs to compare the returns being provided by various companies issuing the infrastructure bonds and check out their credit rating. Experts opine that an investor should also keep in mind the latest financial performance of a company before buying its investment instruments.

How to invest in infra bonds
Investors looking to make the most of their money in infra bonds are often asked to put 50% of the deductible money in the 10 year bonds and the rest in the 15 year bonds. But experts opine that since 20,000 is a small amount it is better to not split it as it may not be tracked properly.

Last updated On: 11th July 2012

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