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Fixed Income

IFCI Infra Bonds: Saves You Tax Too


IFCI has some infrastructure bonds open for purchase, and they give you a tax exemption on a limit of 20,000 per year.


10 year bond, with no exit till five years, but will trade on the BSE – but you can’t exit before 5 years are over. Purchasing these bonds on the BSE is unlikely to provide the same tax benefit (it probably only applies for a purchase directly from IDFC, a primary purchase – not secondary purchases). To be honest it all depends on when they list the bonds and whether on listing such bonds will still have a lock-in etc. 

Rates: 7.85% if you want to sell them back after 5 years, 7.95% otherwise.

Options: Cumulative (interest reinvested annually) or Annual Interest Payout.

Issue Closes: August 31, 2010. You have a week from today.

Issue details:

You need a demat account. Business standard says no harm waiting for other such bond offers for the 20K tax benefit.

Let’s now analyze the non cumulative schemes.

If you’re in the 30.9% tax bracket, investing 20K will save you Rs. 6,180 in tax in the first year, and give you Rs. 1570 in taxable interest, which means a net income of Rs. 1,085 per year. Over five years that’s a total return of 11,604 or about 10% a year, which is nice. Unfortunately the Rs. 20,000 cap on the tax exemption makes it uninteresting for the people in the 30% bracket.

At the 20% bracket the net return, calculated the same way, is 10,352 or 10.35% per year. For the 10% tax bracket it means about 9.1% net yield per year. (Net yield = total interest/investment)

At the cumulative option interest goes to 12.92% net yield per year, which is definitely very interesting. I might be tempted to wait for more as the year goes by, but to people in the 20% tax bracket this could be invested in immediately, with say 10K (leave the rest for a later offering).

Update: There is an awesome comment by reader Kaho Pyare, who specifies that the return is higher because you can reduce the tax from the investment amount. For someone in the 30% bracket, the cumulative option works out to a return of 13.77%, since your investment is about 13,820 (20K minus the tax benefit) and the return after five years post tax is 26,345. Just don’t overpay taxes.

The absolute amounts are small for the 30% bracket (>8 lakhs a year) and perhaps only marginally more significant at the 20% bracket (>5L). It does make sense at the 10% bracket, surely, even if calculated returns are just 9.5% net of taxes over five years.

This isn’t investment advice, just my opinion.


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