A comparison between these two avenues to help you pick the one that suits you best
Infrastructure bonds are the new option on the block to save tax from this year. Till last year, you could invest only Rs 1 lakh and save Rs 30,900 in tax if you were in the highest tax bracket, under Section 80C of the Income Tax Act. However, from the current year, you can invest an additional Rs 20,000 in infrastructure bonds under Section 80CCF. So, you can save up to an additional Rs 6,180 from this year.
The non-banking finance companies (NBFCs), classified as infrastructure finance companies by the Reserve Bank of India (RBI), can issue these bonds. IFCI, IDFC and L&T Infra have already approached the market. Power Finance Corporation and Life Insurance Corporation (LIC) are expected to come up with their issues in the coming months.
The interest offered by these bonds is 7.5-8 percent, varying marginally on account of buy-back and listing options. The interest rates offered by these bonds are linked to the 10-year government of India bond, and cannot exceed that. Presently, the 10-year government bond is close to eight percent .The bonds have a lock-in period. The interest is not subject to tax deducted at source (TDS). Investments up to Rs 20,000 helps in saving tax.
As against the infrastructure bonds, the fixed deposits are for shorter durations. The duration varies from a few days to years. The investors always have an exit option, subject to certain penalty. There is no lock-in period.
The interest rates are up to around 10 percent per annum. On an average, an AA-rated company offers around two percent higher returns than a bank fixed deposit .Before investing in a company deposit you should check whether the term suits your investment objectives. In most cases, premature withdrawal is not allowed before three months. If you wish to withdraw between the third and sixth month, you may not get any interest at all. If you are forced to withdraw the money between six months and a year, you get three percent lesser than the guaranteed returns.
Before investing in a company, check the credentials of the company. Fixed deposits are covered by the Deposit Insurance and Credit Guarantee Corporation of India's guarantee, which assures repayment of Rs 1 lakh in case of a default. However, company deposits offer no such guarantee and the safety of the deposit depends on the company's financial position. You should opt for companies that pay dividends and are profit-making. Investors should give preference to triple-A or double-A rated schemes.
The interest rates offered by the companies vary. Fixed deposits offer higher returns because these deposits are more risky than the state-sponsored small savings schemes or mutual fund schemes which invest in a debt portfolio. Here, the only factor that could assure you of timely payment of interest as well as repayment is the company's financial strength. So, the company with a stronger financial record will pay less and the others will be forced to offer a little more.
Based on your risk profile you could invest in company fixed deposits. You should diversify by spreading your deposits across a number of companies and industries to reduce risk.
The interest earned on fixed deposits is subject to TDS.
