IDFC Long Term Infrastructure Bonds – Tax Saving Bonds u/s 80CCF

IDFC has come out with Tranche 1 of Infrastructure Bonds for FY 2011-12. These bonds provide Tax Deduction u/s 80CCF, over and above Rs. 1,00,000 deduction u/s 80C and an investor can potentially save tax up to Rs. 6,180 by investing Rs. 20,000. Investors get this deduction only for the year of investment and not every year for the next five years.

Interest Rate and Taxability

IDFC is offering 9% interest rate, which is marginally higher than the recently concluded PFC Infra Bond and IFCI Infra Bond offerings. Also mind it: These are Tax Saving bonds and not Tax-Free bonds. The interest earned durind a financial year is taxable in the hands of the holder as per the tax slab applicable that year. But again, the maximum tax an investor would be required to pay annually is Rs. 556 (Rs. 20,000 * 9% * 30.9%), whereas he/she can save up to Rs. 6,180 at one go at the time of making the investment. So net-net the gain is huge. Also there is no TDS on these bonds.

Series 1 2
Interest Rate 9% payable annully 9% compounded annually
Maturity Period 10 years 10 years
Buyback Period 5 years 5 years
Face Value Rs. 5000 Rs. 5000
Buyback Amount Rs. 5000 Rs. 7695
Maturity Amount Rs. 5000 Rs. 11840

Safety and Lock-in Period

Fitch and ICRA have given “AAA” rating to the issue – which is the highest rating for any such issues. As with every Infra Bonds issue of 10 years tenure, the lock-in period is 5 years. After the lock in period, the bond will list on the NSE and BSE. Investors will have the Buyback Option after 5 years, but it is up to them whether they execute it or not.

The bonds will carry the annual interest payment option and the cumulative interest option but to avoid complications, IDFC has decided to offer only 10 years tenure option and opted not to offer 15 years tenure option. To me, it is the best thing they’ve done this year for themselves, the investors as well as the financial advisors and service providers.

I think the single biggest reason for people to invest in these kind of bonds is the Tax Saving they make and not the interest rate on offer. So, the earlier they come out of this kind of investment, the better the effective yield it would generate for them.

Also, 15 years option demands more from people to understand the differences. This complicates the process for the issuers, financial advisors & service providers. As per my dealings I have had so far, more than 95% of the investors opt for 10 years option.

Other Terms of the Issue

Only Resident Individuals and HUFs can apply for these bonds and minimum investment is Rs. 10,000 i.e. 2 bonds. Face Value of each bond is Rs. 5,000. Under the cumulative option, the buyback amount will be Rs. 7,695 after 5 years and the maturity amount will be Rs. 11,840 after 10 years. Investment can be made in Demat as well as physical form. The issue opens on November 21st and closes on December 16th.

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