In the Union Budget 2011-12, the Government retained the additional income tax benefit of Rs 20,000 available 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 is intended to provide a fillip to the infrastructure finance and provide an opportunity to individual tax payers to reduce their tax liability. In light of the same, Industrial Finance Corporation of India (IFCI) ("the issuer"), is now offering Series 3 of the long-term infrastructure bonds which are open for subscription from September 21, 2011 to November 14, 2011.

Before we assess whether the Series III is really worthwhile investing, let's understand the key highlights once again:

 

• 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 Development Finance Company (IDFC)
  2. Life Insurance Corporation of India (LIC)
  3. Industrial Finance Corporation of India (IFCI)
  4. India infrastructure Finance Company Ltd. (IIFCL)
  5. 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 fiscal year 2011-12.
   
• 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.
   
• 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?
  
  Yes. 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 on stock exchange.



 

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

 

Issuer	IFCI Limited ("the Issuer")
Offering	2,00,000, unsecured, redeemable, non-convertible Bonds Series-III, having benefits under section 80 CCF of the Income Tax Act, of face value of Rs 5,000 each,
Instrument	Unsecured, Redeemable, Non-Convertible, Taxable Bonds having benefits under section 80 CCF of the Income Tax, 1961 for long term Infrastructure Bonds
Rating	'BWR AA-' by Brickwork; 'CARE A+' (ind) by CARE & 'LA' by ICRA
Eligible Investors	Retail Individual (major) and HUF
Security	Unsecured
Face Value	Rs 5,000 per bond
Issue Price	At par (Rs 5,000 per bond)
Minimum Subscription	1 Bond and in multiples of 1 Bond thereafter
Tenure	10/15 years, with buyback option after five, seven, ten & twelve years
Options for Subscription	The Bonds are proposed to provide the following options- Option I- 10 years- Cumulative Option II -10 Years-Annual interest payment Option III-15 years-Cumulative Option IV-15 years-Annual Interest Payment
Redemption / Maturity	At par at the end of 10th / 15th year from the deemed date of allotment for Cumulative Option, at par for non cumulative option
Coupon rate	Option I - Cumulative - 8.50% Option II - Annual and Buyback - 8.50% p.a. Option III - Cumulative - 8.75% Option IV - Annual and Buyback - 8.75% p.a.
Listing	Bonds will be listed on BSE
Trustee	IDBI Trusteeship Services Limited
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
Issuance	Demat form or Physical form as specified by the applicant in the application form
Trading	Demat mode only following expiry of the Lock-in Period i.e. 5 years
Issue Open Date	September 21, 2011
Issue Close Date	November 14, 2011
Date of Allotment	Deemed date of allotment is December 12, 2011

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

 

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

 

(Source: Draft prospectus registered with SEBI. & 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 both the options?
  
  Yes, one may invest in both the options. The bonds can be of the same series or bonds across different series.
   
• 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 100,000 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, since these bonds are issued in a demat as well as physical mode and listed on the exchange, no Tax Deduction at Source (TDS) will be done on the interest received under the demat mode.

 

OUR VIEW:

In our opinion investment in IFCI long-term infrastructure bonds, appears enticing only from a tax planning perspective, as an investment upto Rs 20,000 will be eligible for an additional (over and above Rs 1,00,000 benefit limit available under section 80C, 80CCC and 80 CCD of the Income Tax Act, 1961) tax benefit.

It would not be prudent to invest an amount over Rs 20,000, as the excess investment amount over Rs 20,000 will not be eligible for income tax benefit under section 80CCF. Moreover, we believe unsecured nature of the bonds and the ordinary ratings by the independent rating agencies make the issue unattractive despite the attractive interest rate. Further, IFCI has been the first company to issue tax saving bond in this financial year. We expect better rated issues than the IFCI to hit the market in the near future. Hence we recommend you to wait as of now. In case you plan to subscribe for the issue; it is prudent to invest in the "Option II - buyback after 5 years" for the high post-tax yield offered by it.

 

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
kanaksinhmahida@ymail.com Feb 04, 2016 I have applied & allotted 4 bond - Folio No. INE039A09MU6  for 5 years lock in period. After completion of the said period, i have not recd. maturity amount till date. pl provide help for the same K K Mahida m.no. 9724326548
jthanley@mchsi.com Nov 04, 2011 THIS I should have thought of that!

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