Infrastructure bonds may not be for you

One must not get swayed by the heavy advertising of infra bonds. Look at the overall asset allocation and the actual tax benefit before investing,says Ritu Kant Ojha

Written by Ritu Kant Ojha | Published: January 23, 2012 2:17:41 am

It is that time of the year when almost everyone in a job is busy planning taxes. In the 2010 budget,additional tax deduction on investment into infrastructure bonds was allowed with an upper cap of upto Rs 20,000. To tap this huge appetite of investors to invest in infra bonds,several companies have lined up their offerings confusing a retail investor over which one to choose.

It needs to be evaluated whether it makes sense for everyone to invest into these bonds or they may do well to opt for other options. Like a prudent investor one must assess the opportunity cost of locking money for five years or more comparing expected returns on infra bonds with other options.

What are infra bonds

It lets you indirectly invest into the infrastructure sector in India on a long term basis. Companies in the infrastructure sector need to raise long term capital for their projects. The cost of raising capital through the infra bonds is normally lower than the option of borrowing from banks.

In the pre-budget meeting held by the Finance Minister Pranab Mukherjee,with the representatives of banks and financial institutions last week,a demand was made to make banks eligible entities to issue tax free infrastructure bonds. The requirement for special incentives for investors to invest in infrastructure bonds was also highlighted in the meeting. Reports suggest that banks have requested the exemption limit on infra bonds to be raised by current Rs 20,000 to Rs 50,000. It is yet to be seen whether and in which form finance ministry accepts the request from banks. If accepted,it may widen the options available for the investors in future.

The investment made under such bonds are available for tax deduction under Section 80CCF which is over and above the Rs one lakh limit under Section 80C. An investor is free to invest for higher amounts; just that the tax deduction is allowed only upto Rs 20,000.

Normally,the infra bonds have a tenure of 10 — S15 years with a locking period of five years. After the lock-in period is over,the investor can trade the bond on the exchanges. The investor may get the ‘buy-back’ option when investing in an infra bond. It means that the company would buy-back the bond after the lock-in period is over. If the interest rates are in the downward spiral it makes sense to remain invested for the entire period.

Who should invest

The infrastructure bonds are rated by various rating agencies. The recent offers include companies like L&T Infra,REC,PFC,IFCI,SREI Finance and IDFC. According to the experts,except ratings there is not much difference in their respective offerings. One thumb rule is looking at better ratings and other is the maturity tenure. Most experts do not advise staying invested in the infra bonds for a very long time,for example 7 years and beyond unless it is part of overall portfolio strategy.

On an investment of Rs 20,000,someone who is into the highest tax bracket of 30.9 percent would make an absolute savings of Rs 6,180,one into the tax bracket of 20.6 per cent would save about Rs 4,120 while the one in the lowest tax bracket of 10.3 per cent would save Rs 2,060.”Unlike other categories,it does not make much sense for a person in the lowest tax category (below Rs 5 lakh) to invest into infra bonds. Five year lock-in and a small tax benefit is not a great incentive to go for it”,suggests Suresh Sadagopan,a mumbai based wealth manager.

The point to keep in mind,however,is that the interest received on the investment is taxable. So while the investor can claim deduction on the initial principle amount,the interest would be added to the overall income and taxed according to the applicable tax slab. Investors who do not have a demat account can apply in a physical form. Application in joint names is allowed. The name of the applicant shall be the same as the holder/s of the demat account. However,in case of joint names the tax benefit can be claimed only by the first applicant.

It makes sense to align investments into the tax savings infra bonds with the overall portfolio and financial goals. “Besides tax benefit,one needs to be clear of the total debt exposure. Other investment options like debt and balanced funds by mutual funds must be equally evaluated as the investment is for long term”,advises Sumeet Vaid,CEO,Freedom Financial Planners.

The options before the investors is limited these days,with gold still trading at high price and continued volatility in the equity markets. This may prompt investors to go overboard in their investment into infra bonds,investing beyond Rs 20,000 limit. However,it is times like these when an investor must become cautious and choose options wisely. For example,for any goal which is five years and beyond,equity exposure may do well. While saving tax through infra bonds is a good option,one may do well not to ignore other asset classes after providing for the said limit.


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