In the Union Budget 2010, the Government provided an additional income tax benefit of Rs 20,000 under section 80CCF of the Income Tax Act, 1961 for investments made in long-term infrastructure bonds (as notified by the Central Government). This move was intended to provide a fillip to infrastructure finance and provide an opportunity to individual tax payers to reduce their tax liability.

In light of the same PTC India Financial Services (PFS) Ltd ("the issuer"), at present is offering these "long-term infrastructure bonds". PFS is promoted by PTC India Ltd (PTC) as a Special Purpose Investment Vehicle to provide total financial services to the companies in the energy value chain. However, before we assess whether it is really worthwhile investing in these bonds, let’s understand the key highlights:

 

• What are these bonds named as?
  
  These bonds are specifically named as "Long-term Infrastructure Bond".
   
• Who would be the issuers of these bonds?
  
  The bonds will be issued by the following entities:
   
  1. Industrial Finance Corporation of India Ltd.
  2. Life Insurance Corporation of India
  3. Infrastructure Development Finance Company Limited
  4. A Non-Banking Finance Company (NBFC) classified as an Infrastructure Finance Company by the Reserve Bank of India (RBI)
  
   
• When will these bonds be issued?
  
  These bonds will be issued in the financial year 2011-12 and the volume of issuance will be restricted to 25% of the incremental infrastructure investments made by the issuer during the financial year 2009-10.
   
• What is the minimum tenure of these bonds?
  
  These bonds will carry a minimum tenure of 10 years.
   
• Is there a lock-in period while investing?
  
  Yes, an investor is subject to a minimum lock-in period of 5 years while investing in these bonds.
   
• How does one exit after the lock-in period?
  
  After the lock-in period, the investor may exit either through the secondary market or through a buyback facility, as specified by the issuer in the offer document at the time of issue.
   
• What will be the yield on the bond?
  
  The yield on the bond will not exceed the yield on Government securities of corresponding residual maturity (10 year G-Sec for this bond), as reported by the Fixed Income Money Market and Derivatives Association of India (FIMMDA), as on the last working day of the month immediately preceding the month of the issue of the bond.
   
• How would be the proceeds from these bonds used?
  
  The proceeds from these bonds will be utilised for the purpose of infrastructure lending as defined by RBI (as per the guidelines issued by it).
   
• Is interest earned on these bonds taxable?
  
  The interest received in these bonds is not tax free. The investor is liable to pay tax on the interest received.
  
  The interest received on these bonds shall be treated as income from other sources and shall form part of the total income of the assessee in that financial year in which it is received. However no TDS shall be deducted on the interest received as these bonds if issued in Demat mode and listed stock exchange.
   

The details on the "long-term infrastructure bonds" offered by the issuer PFS Ltd. are as under:

Issuer	PTC India Financial Services Ltd. (PFS)
Offering	1,00,000 Secured, Redeemable, Non-Convertible Long Term Infrastructure Bonds (of Series 2) of Rs 5,000/-each for Rs 50 crore, with an option to retain Over-Subscription.
Rating	BWR AA/Stable by Brickwork Ratings, CARE A+ by Credit Analysis and Research Ltd. and ICRA A+ by ICRA
Security	Pari Passu charge on the receivables of the assets created from the proceeds of current Bond issue and other receivables of the Company to provide the 100% security coverage.
Face Value	Rs 5,000 per bond
Issue Price	At par (Rs 5,000 per bond)
Minimum Subscription	1 Bond, further in multiples of 1 bond
Tenure	10 years/15 years, with or without buyback option after 5 years/7 years respectively
Options for Subscription	The Bonds are proposed to provide the following options: Option I: For category I & II investors 11.60% p.a. Option I - Buyback and Non-Cumulative (10 Years) Option II - Buyback and Cumulative (10 Years) Option III - Non Buyback and Non-Cumulative (15 Years) Option IV - Non Buyback and Cumulative (15 Years)
Redemption / Maturity	At par at the end of 10th/15th year from the deemed date of allotment. For Cumulative Option, at par with accumulated interest thereon.
Coupon rate	Option I - Buyback and Non-Cumulative - 8.93/li> Option II - Buyback and Cumulative - 8.93% Option III - Non Buyback and Non-Cumulative - 9.15% Option IV - Non Buyback and Cumulative - 9.15%
Listing	Proposed on the Wholesale Debt Market (WDM) Segment of National Stock Exchange of India Limited (NSE)
Trustee	IDBI Trusteeship Services Ltd
Depository	National Securities Depository Limited and Central Depository Services Limited
Registrars	Karvy Computershare Private Limited
Mode of Payment	Interest payment will be made through ECS/At Par Cheques/Demand Drafts or any other mode as permissible at the time of such payment/s
Issuance	Demat form and physical form
Trading	Demat mode only following expiry of the lock-in period of 5 years
Record Date	3 days prior to each interest payment and/ or principal repayment date.
Issue Open Date	December 30, 2011
Issue Close Date	February 29, 2012
Buy back intimation period	Every year between January 1 to January 31, starting from Year 2017 till 2021 for the 10 year option and between January 1 to January 31, starting from Year 2019 till 2026 for the 15 year option
Deemed Date of Allotment	March 16, 2012

Note: PAN card is mandatory for subscribing to these bonds. A self attested copy shall be enclosed along with the application form.

 

Investors’ will have the following options available at the time of subscribing to the issue:

Options	Option I			Option II			Option III			Option IV
	Annual			Cumulative			Annual			Cumulative
Face Value	Rs 5,000			Rs 5,000			Rs 5,000			Rs 5,000
Minimum Application	Rs 5,000			Rs 5,000			Rs 5,000			Rs 5,000
In Multiples of	Rs 5,000			Rs 5,000			Rs 5,000			Rs 5,000
Tenor	10 Years			10 Years			15 Years			15 Years
Buy Back Option	At the end of 5 yrs + 1 day			At the end of 5 yrs + 1 day			At the end of 7 yrs + 1 day			At the end of 7 yrs + 1 day
Interest Payment	March 15, every year			N.A.			March 15, every year			N.A.
Coupon	8.93% per annum			8.93% per annum (compounded annually)			9.15% per annum			9.15% per annum (compounded annually)
Yield if buyback option executed
Tax Slabs	10.3	20.6	30.9	10.3	20.6	30.9	10.3	20.6	30.9	10.3	20.6	30.9
Pre-Tax yield p.a.	11.8	15.1	19.0	11.3	14.1	17.3	11.4	13.9	17.0	10.9	12.8	15.1
Post-Tax Yield p.a.	10.8	12.9	15.5	10.5	12.4	14.6	10.3	11.7	13.4	10.1	11.2	12.6
Yield if buyback option not executed (i.e. held until Maturity)
Tax Slabs	10.3	20.6	30.9	10.3	20.6	30.9	10.3	20.6	30.9	10.3	20.6	30.9
Pre-Tax yield p.a.	10.6	12.7	15.1	10.1	11.5	13.0	10.5	12.2	14.2	9.9	10.8	11.9
Post-Tax Yield p.a.	9.7	10.5	11.5	9.4	10.1	10.8	9.5	10.0	10.5	9.4	9.6	10.0

* Assuming that the income tax slab of the investor remains the same across the bond tenure
(Source: Information Memorandum & PersonalFN Research)

Well, after reading the details of the scheme, there may be still some more questions popping up, which are attempted to answer herein:

 

• Can one invest in all the four options?
  
  Yes, one may invest in all the four options, subject to a minimum application amount of Rs 5,000 under each option.
   
• Can one apply in joint names?
  
  Yes, one may apply in a joint name (with a maximum of three applicants). However, the demat accounts will also be required to be held in joint name and the order of applicant shall be the same as appearing in the demat account. Moreover, the tax benefit can be availed only by the first applicant.
   
• Who will get the interest in case of joint application?
  
  In case of joint application, interest will be paid to the account of the first holder only.
   
• My demat account is in joint name, but I want to apply is a single name?
  
  In case of a single application, demat account of the same single applicant would be necessary. Joint demat account would not do.
   
• Can one pledge or lien or hypothecate the bond, while obtaining a loan from a scheduled commercial bank?
  
  Yes, one may pledge or lien or hypothecate the bond, while obtaining a loan from a scheduled commercial bank. However, this can be done once the said lock-in period is over.
   

TAXATION OF LONG-TERM INFRASTRUCTURE BONDS:

Your investment in these "long-term infrastructure bonds" will be eligible for a deduction under section 80CCF of the Income Tax Act, 1961 subject to a maximum limit of Rs 20,000. This deduction limit of Rs 20,000 will be over and above Rs 1,00,000 benefit available under section 80C, 80CCC and 80CCD.

However, the interest earned by you on the investments (in these bonds), will be taxed (they would be included in the "Income from Other Sources", in the financial year in which it is received). However, if an investor opts for demat mode no Tax Deduction at Source (TDS) will be done on the interest received. But if physical delivery of the bond is opted for then TDS shall be deducted.
 

OUR VIEW:

In our opinion investment in PFS’s long-term infrastructure bonds, is a risky bet as they score low on ratings provided by Brickwork and ICRA, though the company offers the attractive rate of interest.

Instead investors should settle for a little less yield and invest upto a maximum of Rs 20,000 (as anything above the Rs 20,000 limit under section 80CCF will not attract tax exemption) in a better rated long term infrastructure bonds which are on offer at present in the market. Also, make sure to select the right option in order to benefit from the high yields on these bonds.

 

In case you wish to invest in the above instrument, you can email us at info@personalfn.com or contact us on 022-6136 1200

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Comments
bargec@dailycamera.com Feb 25, 2012 I have some TIPS with Vanguard but will be looking at munis for retirement. That is a few years down the road..They are a great source of tax free income for those on a fixed income however I still have a longer investing horizon so equities makes more sense for me now.
crbhanwala@gmail.com Nov 30, 2019 I want to shift 4 bonds from one demat account to another account How is it possible?

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