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IDFC Infrastructure Bonds

 IT'S that time of the year when employees have to make a declaration of investments, both under Section 80C and 80 CCF, to their companies. Tax payers will get additional benefits of 20,000 under Section 80CCF. This benefit, which was introduced last year, is only for infrastructure bonds.

So, Infrastructure Development Finance Corporation (IDFC) issue of infrastructure bonds, which were launched today, has timed things perfectly for the employees. It is offering an annual return of nine per cent per bond with a maturity of 10 years. The minimum investment required is 10,000 (two bonds of face value `5,000 each). And, investors can receive the bond papers in either physical form or demat. There may be more issues from other companies, too.

However, experts said that unlike last year, the rates offered may not climb steadily with each issuance (the rates rose from 7.5 to eight to 8.25 per cent over the three tranches announced by IDFC in October 2010, January and February, 2011, respectively).

The returns from these are benchmarked against the 10-year government securities yield. Given the uncertain interest rate environment, it is difficult to predict the rate movement and whether subsequent rates for any issues will be higher.

By and Large, Interest rates are likely to remain stable in the near term. Even in the long term, these are not likely to rise much.

Considering the relatively small amount of investment, financial planners feel those in the highest tax bracket can invest funds right away. Others can exhaust the other tax-saving avenues first and then turn towards this, though not later than January

INTEREST PAYOUT:

One can choose from an annual or cumulative interest payout. In the case of latter, the interest will be compounded annually and on maturity one will receive `11,840 per bond. Say, you invest `20,000. In case, you opt for the cumulative option, you will get `47,360, a pre-tax return of 27,360. However, if you choose the annual interest payout option, you will get 1,800 yearly, a total of `18,000 over the 10-year period.

The option chosen will depend on ones cash requirement. However, at 1,800 annually, financial advisors deem the amount low. They feel investors may be better off with the cumulative option.

TAXATION:

These long-term bonds allow individuals to claim up to `20,000 as deduction under Section 80CCF, in addition to the regular section 80C limit of `1lakh. However, the interest earned on the bonds is added to your income and taxed according to the slab.

Any investment in excess of the 20,000 limit does not make sense. Reasons: One will get higher rates from other debt products like fixed deposits, and for lesser maturity periods. For instance, SBI offers a 9.25 per cent return on one- to ten-year deposit.

EXIT ROUTES:

There is a lock-in of five years. Investors looking for an exit can opt for a buyback after that. However, they must intimate the company six-nine months prior to the buyback date, to be able to exercise the option. After the lock in period, the bonds will be listed on the stock exchanges, providing a second exit route. However, There isn't much liquidity in this space, as bonds are not traded regularly. If one wishes to exit the investment, a buyback may serve the purpose better. The current issue is open from November 21 to December 16.
 

Download Section 80CCF Tax Saving IDFC Infrastructure Bonds Application Form

 

http://www.docstoc.com/docs/105113341/IDFC-Long-Term-Infrastructure-Bond-Tranche-1-Application-Form

 

Download Section 80CCF Tax Saving L&T Infrastructure Bonds Application Form

 

http://www.slideshare.net/PrajnaCapital/lt-long-term-infrastructure-bond-tranche-1-application-form

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