Modest returns make it unsuitable for those below 30% income tax bracket IF you take a five-year investment period, equity market-linked products would offer better returns than infra bonds
THE number of infrastructure bonds that have hit the market recently to coincide with the tax-saving investment rush have not cut much ice with financial experts, who have an issue with the modest returns that these plans offer as well as the long lock-in period.
Power Finance Corporation, which issued infra bonds at 8.50 per cent interest rate a few months ago, is also expected to announce its second infrastructure bond issue in a few days.
The bonds are best suited for those with a taxable income of over Rs 800,000, who will fall under the 30 per cent tax slab, according to financial experts.
For those who are in the 30 per cent tax bracket and have already exhausted the limit of Rs 100,000 under Section 80C, it makes sense to invest Rs 20,000 in these bonds as it would result in savings of Rs 6,158 (including surcharge). In this case, the post-tax return should work out higher.
For those in the 10 per cent or 20 per cent tax slabs, such investments will help savings of Rs 2,000 and Rs 4,000, respectively.
In these cases, the post-tax returns will not compare favourably even with bank fixed deposits.
Assuming that people split their total investment between equity-based instruments and debt-based instruments in the ratio 70:30, it would be wise to invest only the debt portion of their planned investment in infrastructure bonds and not the equity portion.
All infra bonds have a minimum lock-in period of five years, which extends up to seven, 10 and 15 years based on the plan one has opted for. The lock-is period is too long, financial planners said.
If you take a five-year investment period, equity market-linked products like mutual funds would offer better returns than the eight-odd per cent offered on these infra bonds. This despite the volatile stock market conditions that we see now.
