Should you invest in “Long-term Infrastructure Bonds”?

In the Union Budget 2010, the Government provided an additional income tax benefit of Rs 20,000 under section 80CCF of the Income Tax Act, 1961 for investments made in long-term infrastructure bonds (as notified by the Central Government). This move was intended to provide a fillip to infrastructure finance and provide an opportunity to individual tax payers to reduce their tax liability.

 

In light of the same IFCI Ltd (“the issuer”), at present is offering these “long-term infrastructure bonds”. However, before we assess whether it is really worthwhile investing in these bonds, let’s understand the key highlights:

 

• What are these bonds named as?
  
  These bonds are specifically named as “Long-term Infrastructure Bond”.


• Who would be the issuers of these bonds?
  
  The bonds will be issued by the following entities:
   
  1. Industrial Finance Corporation of India Ltd.
  2. Life Insurance Corporation of India
  3. Infrastructure Development Finance Company Limited
  4. A Non-Banking Finance Company (NBFC) classified as an Infrastructure Finance Company by the Reserve Bank of India (RBI)


• When will these bonds be issued?
  
  These bonds will be issued in the financial year 2010-11 and the volume of issuance will be restricted to 25% of the incremental infrastructure investments made by the issuer during the financial year 2009-10.


• What is the minimum tenure of these bonds?
  
  These bonds will carry a minimum tenure of 10 years.


• Is there a lock-in period while investing?
  
  Yes, an investor is subject to a minimum lock-in period of 5 years while investing in these bonds.


• How does one exit after the lock-in period?
  
  After the lock-in period, the investor may exit either through the secondary market or through a buyback facility, as specified by the issuer in the offer document at the time of issue.


• What will be the yield on the bond?
  
  The yield on the bond will not exceed the yield on Government securities of corresponding residual maturity (10 year G-Sec for this bond), as reported by the Fixed Income Money Market and Derivatives Association of India (FIMMDA), as on the last working day of the month immediately preceding the month of the issue of the bond.


• How would be the proceeds from these bonds used?
  
  The proceeds from these bonds will be utilised for the purpose of infrastructure lending as defined by RBI (as per the guidelines issued by it).

The details on the “long-term infrastructure bonds” offered by the issuer IFCI Ltd. are as under:

Issuer	IFCI Limited (“the Issuer”)
Offering	1,00,000 Unsecured, Redeemable, Non-Convertible, Taxable Bonds of Rs 5,000 each aggregating to Rs 50 Crore with a green-shoe option to retain over-subscription for issuance of additional Infrastructure Bonds
Type	Private Placement basis
Instrument	Unsecured, Redeemable, Non-Convertible, Taxable Bonds having benefits under section 80 CCF of the Income Tax, 1961 for long term Infrastructure Bonds
Rating	BWR AA- by BRICKWORK RATINGS INDIA PVT LIMITED
Eligible Investors	Retail Individual and HUF
Security	Unsecured
Face Value	Rs 5,000 per bond
Issue Price	At par ( Rs 5,000 per bond)
Minimum Subscription	1 Bond and in multiples of 1 Bond thereafter,
Tenure	10 years, with or without buyback option after five years
Options for Subscription	The Bonds are proposed to provide the following options- Option I - Non-cumulative and Buyback after 5 years Option II - Cumulative and Buyback after 5 years Option III - Non-cumulative and no Buyback Option IV - Cumulative and no Buyback
Redemption / Maturity	At par at the end of 10th year from the deemed date of allotment. For Cumulative Option, at par with cumulated interest thereon.
Coupon rate	Option I (Non-cumulative and Buyback after 5 years) - 7.85% p.a. Option III (Non-cumulative and no Buyback) - 7.95% p.a. Option II and Option IV will have cumulative payment at the end of the Buyback period or 10 years, as per the option opted by the Investor.
Listing	Proposed to be listed on BSE
Trustee	Axis Trustee Services Limited
Depository	National Securities Depository Ltd. and Central Depository Services (India) Ltd.
Registrars	M/S Beetal Financial & Computer Services (P) Ltd.
Mode of Payment	Interest payment will be made through ECS/At Par Cheques/Demand Drafts
Issuance	Demat form only
Trading	Demat mode only
Issue Open Date	August 9, 2010
Issue Close Date	August 31, 2010 The issuer would have an option to pre-close the issue by giving 1 day notice to the arrangers
Deemed Date of Allotment	September 15, 2010

Note: PAN card is mandatory for subscribing to these bonds. A self attested copy shall be enclosed along with the application form.

Investors’ will also have the following options available at the time of subscribing to the issue:

	I	II	III	IV
Options	Buyback / Non Cumulative Option	Buyback / Cumulative Option	Non Buyback / Non Cumulative Option	Non Buyback / Cumulative Option
Minimum Application / Face Value	Rs 5,000	Rs 5,000	Rs 5,000	Rs 5,000
In Multiples of	Rs 5,000	Rs 5,000	Rs 5000	Rs 5,000
Buy Back Option	Yes	Yes	No	No
Interest Payment	Yearly	N.A.	Yearly	N.A.
Coupon	7.85% per annum	7.85% per annum (to be compounded annually)	7.95% per annum	7.95% per annum (to be compounded annually)
Yield on Redemption	7.85%	7.85%	7.95%	7.95%
Coupon Payment Date	September 15 every year	N.A.	September 15 every year	N.A.
Redemption Date	September 15, 2020	September 15, 2020	September 15, 2020	September 15, 2020
Buy Back Period	Every Year Between August 16 to August 31, starting from Year 2015 till Year 2019	Every Year Between August 16 to August 31, starting from Year 2015 till Year 2019	N.A.	N.A.

(Source: Application form of IFCI Ltd.)

Well, after reading the details of the scheme, there may be still some more questions popping up, which are attempted to answer herein:

• Can one invest in all the four options?
  
  Yes, one may invest in all the four options, subject to a minimum application amount of Rs 5,000 under each option.


• Can one apply in joint names?
  
  Yes, one may apply in a joint name (with a maximum of three applicants). However, the demat accounts will also be required to be held in joint name and the order of applicant shall be the same as appearing in the demat account. Moreover, the tax benefit can be availed only by the first applicant.


• Who will get the interest in case of joint application?
  
  In case of joint application, interest will be paid to the account of the first holder only.


• My demat account is in joint name, but I want to apply is a single name?
  
  In case of a single application, demat account of the same single applicant would be necessary. Joint demat account would not do.


• Can one pledge or lien or hypothecate the bond, while obtaining a loan from a scheduled commercial bank?
  
  Yes, one may pledge or lien or hypothecate the bond, while obtaining a loan from a scheduled commercial bank. However, this can be done once the said lock-in period is over.

 

TAXATION OF LONG-TERM INFRASTRUCTURE BONDS:

Your investment in these “long-term infrastructure bonds” will be eligible for a deduction under section 80CCF of the Income Tax Act, 1961 subject to a maximum limit of Rs 20,000. This deduction limit of Rs 20,000 will be over and above Rs 1,00,000 benefit available under section 80C, 80CCC and 80CCD.

 

However, the interest earned by you on the investments (in these bonds), will be taxed (they would be included in the “Income from Other Sources”, in the financial year in which it is received). However, since these bonds are compulsorily issued in a demat mode and listed on the exchange, no Tax Deduction at Source (TDS) will be done on the interest received.

OUR VIEW:

In our opinion investments in “long-term infrastructure bonds”, appears enticing only from a tax planning perspective, as an investment upto Rs 20,000 will be eligible for an additional (over and above Rs 1,00,000 benefit limit available under section 80C, 80CCC and 80 CCD of the Income Tax Act, 1961) tax benefit.

 

It would not be prudent to invest an amount over Rs 20,000, as the excess investment amount over Rs 20,000 will not be eligible for income tax benefit under section 80CCF. Also we are in a scenario of rising interest rates, whereby going forward there may be such other offerings under section 80CCF by the eligible issuers, which may offer a better rate of interest along with tax benefit.

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