IDFC Long Term Infrastructure Bonds

by Gopal Gidwani on October 2, 2010 · 7 comments

in Taxation,Uncategorized

Introduction
In February 2010, in his budget speech the Finance Minister Pranab Mukherjee added one more investment instrument to the basket of Tax Saving Instruments. This latest new addition is ‘Infrastructure Bonds’. The investment limit of Section 80C has been enhanced from Rs 1,00,000 to Rs 1,20,000. This provision (Section 80CCF) of additional Rs 20,000 has been made specifically for infrastructure bonds. The funds collected from the issuance of these bonds will be used build India’s crumbling infrastructure like roads, airports, power plants and other core infrastructure projects. So to avail this benefit of income tax deduction of additional Rs 20,000 from taxable income, let us see what are the terms and conditions related to it.

Features of Infrastructure Bonds
Tenure: The minimum tenure of these bonds will be 10 years. The lock-in period for these bonds will be 5 years. So if the investor does not want to hold these bonds for the entire tenure, then he can sell these bonds in the secondary market after 5 years.
Who can issue these Bonds: The Government has so far allowed Industrial Finance Corporation of India (IFCI), Life Insurance Corporation of India (LIC), Infrastructure Development Finance Corporation (IDFC) and Non Banking Finance Companies (NBFCs) approved by the RBI to issue these bonds. The Government may from time to time allow other financial institutions to raise money by issuing infrastructure bonds.
Income Tax Benefits: Under Section 80CCF of the Income Tax Act, the maximum deduction from taxable income that can be availed by investing in these bonds is Rs 20,000.
Interest: The interest rate paid on these bonds will depend on the interest rates prevailing in the market at the time of issuing these bonds. The interest rate may be linked to the yield on G-Sec (Government Securities) of similar tenures.
Others: Investors will have to furnish their PAN card number to the issuing company for buying these bonds.

IDFC Long Term Infrastructure Bonds
IDFC has launched the public issue of Long Term Infrastructure Bonds. The issue opened on 30th September 2010 and will close on 18th October 2010. IDFC aims to raise an amount of up to Rs 3400 Crores from the issue.

  • Resident Indian Individuals can apply for the Bonds
  • The bonds will have a lock-in period of 5 years with maturity tenure of 10 years. The Bonds will be listed on the Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). The bonds will be tradable after the lock-in period of 5 Years. Investors can sell the bonds on the stock exchange any time after 5 years or retain the bonds till maturity.
  • Individuals applying for these bonds will get income tax deduction (maximum Rs 20,000) benefit from their taxable income under the provisions of Section 80CCF of the Income Tax Act. On an investment of Rs 20,000 a person falling in 30% income tax bracket will be able to reduce his tax outgo by Rs 6,000. A person falling in 20% tax bracket will be able to reduce his tax outgo by Rs 4000 and a person falling in 10% tax bracket will be able to reduce his tax outgo by Rs 2000.
  • The Face Value of each Bond is Rs 5000. The minimum application is of 2 Bonds and in multiples of 1 Bond thereafter. So the minimum investment required is Rs 10,000.
  • Application for these bonds can be made in any one of the 4 series
    1. Series-1: Bonds carry a coupon (interest) rate of 8% payable annually.
    2. Series-2: Bonds carry a coupon rate of 8% compounded annually. The interest will be cumulative. The value of an Rs 5000 Bond on maturity of 10 years will be Rs 10,800.
    3. Series-3: Bonds carry a coupon rate of 7.5% payable annually. Bonds issued under this series will have a buyback option after the mandatory lock-in period of 5 years.
    4. Series-4: Bonds carry a coupon rate of 7.5% compounded annually. The interest will be cumulative. Bonds issued under this series will have a buyback option after the mandatory lock-in period of 5 years. The buyback value of an Rs 5000 bond after 5 years lock-in period will be Rs 7,180. The value of an Rs 5000 Bond on maturity of 10 years will be Rs 10,310.
Series of BondsCouponInterest paymentBuyback#Listing
Series-18.00 %AnnuallyNY
Series-28.00 %CumulativeNY
Series-37.50 %AnnuallyYY
Series-47.50 %CumulativeYY

# Buyback option will be available after expiry of 5 year lock-in period

  • The issued has been granted LAAA credit rating by rating agency ICRA. LAAA indicates the highest level of safety.
  • The money raised from the bonds issue will be used by the company for its infrastructure lending activities.
  • There will be no Tax Deducted on Source (TDS) on these Bonds.
  • The interest accrued on the Bonds will be credited to the respective bank registered with the Demat Account through ECS on the due date for interest payment.
  • The bonds can be pledged for availing loans after the lock-in period of 5 years.

About IDFC
Infrastructure Development Finance Company (IDFC) was formed in 1997 to look into the diverse needs of infrastructure development. The company came out with an initial public offering (IPO) and was listed on the BSE and NSE in August 2005. Primarily IDFC was started as an infrastructure financing company, but over a period of time the company has diversified into investment banking, mutual fund business, asset management and host of other financial services.

Conclusion
The Government believes that India’s infrastructure sector can absorb investments to the tune of $ 1 Trillion for the 12th Five Year Plan (2012-2017). The money raised from infrastructure bonds will fill that gap to some extent. The funds raised from these bonds will give a much needed fillip to build the country’s infrastructure. These bonds will help the funds starved companies to raise the money and at the same time it will give the investors in these bonds, income tax benefits.

Please Note: The information has been sourced from the company website. Investors are requested to check the issue prospectus before taking a call on investing in the Bond Issue.

Please let us know your comments on the article by putting your comments in the section below or writing to us at gopal_gidwani@yahoo.com

{ 5 comments… read them below or add one }

satish April 11, 2011 at 10:42 am

Dear Gopal,
Can you suggest me some good Tax-saving plans?
Also,what should be the ideal time of year to invest in those plans?I have heard that it is good to invest in Feb-Mar to get highest gains.

Reply

Gopal Gidwani April 25, 2011 at 11:50 am

Hi Satish,
You can go for SBI Magnum Tax Gain 93 and HDFC Tax Saver ELSS plans. With regards to timing it is better to stagger your investments throughout the year. So say if you want to invest Rs. 1,00,000 over the entire year then from April itself you can start investing Rs. 8300 every month. Also there is no relation between investing in February and March for highest gains.

Reply

Satish April 25, 2011 at 12:13 pm

Did you mean SIP?
If yes,Pls clear my foll query on SIP:
Considering the 3 yr lock-in period for ELSS,when will i be able to withdraw(if i wish) my invested amount?
For eg:
If i invest 4000 in April2011,then May2014 will mark the end-date for 1st SIP.Similarly,June2014,July2014,..etc will be maturity dates for subsequent SIPs done in May,june2011?
Am i right on above?
So,does that means that at the beginning of 4th yr,i will receive check every month(if i select to redeem my Units)
And,assuming that market is low in May2014,can i keep the Units and if market is up in Aug2014,can i sell the units of April,May,June2011 in August2014 at one time??

Reply

Gopal Gidwani April 25, 2011 at 3:45 pm

Hello Satish,
Yes I meant SIP.

Your understanding of ELSS plans is correct. Each monthly investment made in a ELSS plan has a lock-in of 3 years from the date of investment. You are correct in saying investment of Rs 1000 every month made in the months of April 2011, May 2011, June 2011 and July 2011, you will be able to redeem them in the months of April 2014, May 2014, June 2014 and July 2014.
You will have to place the withdrawal request with the AMC. Also if the market is low in May 2014 you can continue holding your units if you wish to and redeem them whenever you wish to. Also once all the installments complete the lock-in period you can sell them all at one go in August 2014. So your understanding of ELSS plans is correct.

Reply

Satish April 26, 2011 at 5:22 am

Dear Gopal,
Very much thanks for the clarification.However,i have some more queries.
Can you tell me the modes/ways of investing into ELSS.Can it be done On-line.
you mentioned AMC.So,are these plans which you suggested above(SBI Magnum Tax Gain 93 and HDFC Tax Saver ELSS plans) are from AMCs??
Hope iam not disturbing you.Also,if you can share your email-id,we can communicate on mail.

Reply

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