Should you invest in IDFC Infrastructure Bonds under Second Tranche?

As you all know that investment in infrastructure bonds are also eligible for additional tax exemption upto Rs. 20000 under section 80CCF. This is second tranche from IDFC ltd and there are a lot of investors who are considering these bonds again as an option to save additional tax this year.  I will brief you about IDFC infrastructure bonds in this article. 

About issue??

The company is planning to raise around 3400 crore for the financial year 2010-2011. These bonds come with the maturity of 10 years and lock-in period of 5years. These bonds will be listed in BSE and NSE. After 5 years you can keep them for additional 5 years and withdraw money at any time just by returning them to company or by selling in a secondary market. This time company issuing 2 different series:  series1 do not provide cumulative interest but have an option of buy-back. Company will pay interest annually at rate 8% p.a. Series 2 will provide you cumulative interest rate with buy-back option. Company will provide 8% interest rate compounded annually.

About taxation??

These bonds will get tax exemption under section 80CCF upto Rs. 20000. However interest earned on these bonds will be taxable for an investor.

About Real Return??

The interest rate under these bonds are 8% but still the actual return works out to be much more than that once you add on the tax deduction factor in it.  For example: - Suppose you fall under tax bracket of 30.9% and you invested 20000 in these bonds. This means your tax for this year will goes lower by 6180, and you earn a 1600 interest after one year. So, effectively your return after 5 year will be nearly 11% to 12% in case of annually interest payment.

	Series 1	Series 2
Face Value per Bonds	5000	5000
Frequency of Interest Payment	Annually	Cumulative
Interest Rate	8% p.a	N.A
Buyback Option	Yes	Yes
Buyback Date	Date falling 5 years & 1 Day from the Deemed Date of Allotment	Date falling 5 years & 1 Day from the Deemed Date of Allotment
Maturity Date	10 years from the Deemed Date of allotment	10 years from the Deemed Date of allotment
Buyback Amount	5000 per bond	7350 per bond
Maturity Amount	5000 per bond	10800 per bond
Yield on Maturity /Buyback	8%	8% compounded annually

Other features of IDFC Infrastructure bonds.

• The bonds don't attract any TDS.  
• These bonds have got rating of LAAA by rating agency ICRA and AAA (ind) by FITCH indicating a stable outlook. 
• The interest accrued on the Bonds will be credited to the respective bank registered with the dematerialized account through electronic clearing service (“ECS”) on the due date for interest payments.
• Investors can mortgage or pledge or hypothecate or mark lien over these bonds to avail loans only after the lock-in period.
• Investment in the Bonds can be made in dematerialized and physical forms.
• An investor would need to provide his or her PAN card to invest in these Bonds. 
• The Bonds will be issued only to resident Indian individuals (major) and HUFs.
• An applicant may subscribe to both options but the minimum application under each option shall be one Bond i.e., Rs. 5,000.   
• Interest on the Bonds shall be payable on annual or cumulative basis depending on the series selected by the Bondholder.
• Issue closing date is February 04, 2011

·       

You can subscribe in these bonds through physical form also by just following these steps:-

• Don’t fill up the dematerialized details in the application form
• Compulsorily provide the following three documents with the application form:
• Self-attested copy of the PAN card;
• Self-attested copy of a cancelled cheque of the bank account to which the amounts pertaining to payment of refunds, interest and redemption, as applicable, should be credited.
• Self-attested copy of the proof of residence. Any of the following documents shall be considered as a verifiable proof of residence:
• Ration card issued by the Government of India; or
• Valid driving license issued by any transport authority of the Republic of India; or
• Electricity bill (not older than 3 months); or
• Landline telephone bill (not older than 3 months); or
• Valid passport issued by the Government of India; or
• Voter’s Identity Card issued by the Government of India; or
• Passbook or latest bank statement issued by a bank operating in India; or
• Leave and license agreement or agreement for sale or rent agreement or flat maintenance bill; or
• Letter from a recognized public authority or public servant verifying the identity and residence of the Applicant.

It is stated in the prospectus of these bonds that they provide interest rate of 8% which would further reduce if we consider tax on interest earned. But if you have different outlook then the money you save through tax-exemption at the time of investment in these bonds then your over all return will going to be around 11% to 12% in case of 30.9% tax bracket. Now, decision is yours whether to invest or not.