IDFC Infrastructure Bonds open for a limited period: INVEST

IDFC Infrastructure Bonds open for a limited period: INVEST if you are in the upper tax bracket

Sep 30, 2010
In the last budget, FM Pranab Mukherjee had allowed Investors to invest additional Rs. 20,000 over & above Rs. 1 lac that one is usually allowed u/s 80C to claim deductions. Hence, this (FY 2010-11) is the only financial year in which one can invest Rs. 1.20 lacs per Income Tax file & avail additional deduction.
The extra deduction of up to 20,000 is allowed u/s 80CCF if one invests in govt. specified Infrastructure Bonds to be issued by Infrastructure NBFCs like IFCI, IDFC, etc. Further, these bonds shall remain open for a specified  time period only. IFCI had last month come out with its Infra bonds & the issue is closed now. 

IDFC Infrastructure Bonds issue opens tom on 30th September 2010 & shall remain open for subscription till Oct 18th 2010 only.
 
The bonds have a tenure of 10 years & expected yield of 7.5 % pa or 8.0% pa depending on the option chosen. 

Who can Invest? Individuals & HUF only;    

What you need to Invest? PAN no. & a Demat Account 

(although we believe that making demat compulsory is an unnecessary requirement as one may want to Invest for all members in the family but they might not have a demat account; opening a demat for the sole purpose of investing in these bonds is not advised as it adds to the cost. Also, HUFs rarely have a demat account)


There are four option to choose from:

Bond Type	Interest Rate	Tenure	Buyback Option
Bond Series 1	8.0 % pa annual interest	10 years	No
Bond Series 2	8.0 % pa cumulative interest; compounded annually	10 years	No
Bond Series 3	7.5 % pa annual interest	10 years	Yes; after 5 years
Bond Series 4	7.5% pa cumulative interest; compounded annually	10 years	Yes; after 5 years

Analysis & Comments
Any investor who is in the 30% tax bracket, should subscribe to these bonds as it will result in total tax savings of approx. Rs. 36,000 this financial year (30% of Rs. 1.20 lac; surcharge & cess excluded).
The yield under various options are explained in the table below:

Tax Bracket		Tax Adjusted Yield to Investors
Your Tax bracket	Effective Tax Rates (%)	Series 1 (%)	Series 2 (%)	Series 3 (%)**	Series 4 (%)**
30%	30.9%	13.89 %	12.06%	17.19%	15.74%
20%	20.6%	11.57%	10.52%	13.41%	12.57%
10%	10.3%	9.64%	9.18%	10.23%	9.86%

**yield calculated assuming buyback at the end of 5 years

So if you are in the highest tax bracket and have already exhausted the limit of Rs. 100,000 u/s 80C, then it makes sense to invest the maximum amount of Rs. 20,000 in these bonds. We would suggest option 3 so as to net a yield of 17.19% in 5 years. Go for the buyback option that has a lock-in for 5 years only.
 
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