Infrastructure Bonds in India

What are infrastructure Bonds?

Infrastructure bonds are long term investment bonds issued by any non banking financial company like Industrial Finance Corporation of India or IDF. These companies are an ombudsman borrowing from the investors and lending to the government. These bonds are used to fund government’s infrastructure projects. Thus an individual is directly helping in nation development.

These bonds have a maturity period of 10 to 15 years. After say 5 years one can use the option of buy back or he can always enjoy the interest annually or compounded interest at the end of the period. While the buy-back facility for the 10-year bonds is after 5 years, for the 15-year option it comes after 7 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.

Top Infrastructure Bonds

Following are the best infra bonds in India:

• IDFC Infrastructure Bonds
• L&T Infrastructure Bonds
• IDBI Flexi bonds
• IIFCL Long Term Infrastructure Bonds
• IFCI Infrastructure Bonds
• ICICI Safety Bonds
• REC Tax Saving Infrastructure Bonds

Features of Infrastructure Bonds:

• They are also like other bonds but the only difference is the money that is accumulated from these bonds is spent for the improvement of the infrastructure of the country.
• They carry an Interest rate of about 8% to 10%.
• These bonds unlike the savings account provide much higher returns.
• Usually these bonds come with a maturity period of 10 or 15 years and have a lock in period of 5-7 years respectively.
• One can sell the bonds in a Dematerialized form after the completion of the lock in period.
• Bonds can be readily sold over both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE).

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.  One may also not purchase on the basis of Secured and Unsecured bonds because secured doesn’t mean any kind of guarantee – it simply means that the company has set aside some assets against this bond issue. If anything happens to the company then those assets will be sold to recover the money for the bondholders. That’s all it means – it does not mean a guarantee from the company or the government of India that you will be repaid no matter what.

How to apply?

One can choose to apply for only the 10-year bonds or only the 15-year bonds or a combination of the two. If one has a demat account one can apply in the demat mode, else one can even opt for physical certificates. If one is applying in the demat mode, one need to provide details of your demat account along with a copy of your Permanent Account Number (PAN) card, along with a cheque. However, if one is looking to invest in physical form, one need to attach a copy of your residence proof as well.

The face value of each bond is Rs 5,000 and one has to make an application of one bond and in multiples of one bond thereafter. There is no upper limit on the amount one can invest. Only in the case of SREI Infra, the face value is Rs 1,000 and one can apply for a minimum of one bond.

No Tax benefit from Infrastructure Bonds in Financial Year 2012-2013:

This year onwards, there will be no tax benefit from Infrastructure Bonds.

On one hand Mr. Pranab Mukherjee gave some extra money by increasing basic exemption limit by Rs 20,000 and on the other hand he took back more by taking back Rs. 20,000 tax deduction provided under section 80CCF using long term infrastructure bonds. The tax benefit had been extended till 2011-12 and experts had asked that the tax exemption limit be increased from Rs. 20000 to Rs.50000 but Mr. Mukherjee didn’t mention anything about 80CCF and thus removing it from picture.

The Impact of such decision will be that such bonds will lose their attractiveness.

Rs. 20000 increase in basic exemption limit provided 2000 extra to every men. But removal of  infra bonds results in extra tax of same 2000 for Men in 10% tax limit, 4000 for 20% tax limit and 6000 for 30% tax limit (Not including cess and other charges). For women tax payers, conditions are even worse. With no change in basic exemption limit for them it could only be bad for them.
This is negative not only for individuals but for infrastructure companies as well. Long term infra bond was a source of low interest capital for these companies. Now after removal of this tax benefit from investors, their sale will surely come down and these companies will have to go to market for fund raising on higher interest rates. In country like India where condition of infrastructure is already bleak, I am not sure how removal of provisions of 80CCF will work for greater good.

Mr Mukherjee has proposed to raise Rs 60,000 crore in 2012-13 for financing infrastructure projects. These bonds are tax-free infra bonds that the he had announced while these will not qualify for deductions; they will fetch tax-free returns of 8.2-8.3% per annum. It Means Interest earned from these bonds is exempted but these are not available for deduction (like in past u/s 80CCF)

Latest Information regarding Infrastructure bonds:

According to finance ministry, India will reduce the lock-in period for foreign investment in some long term infrastructure bonds to one year from three years. It is also said that Lower lock-in period of infra bond will be a key to more money.

Tags: Infrastructure Bonds, Save Tax, Type of Bonds