IDFC TAX-SAVING BONDS
Rama Krishna Vadlamudi, HYDERABAD October 15, 2010
Infrastructure Development Finance Company Limited (IDFC) has come out with a tax-saving Long-Term Infrastructure Bonds issue. The bonds are fully secured. The issue was opened on September 30, 2010 and closes on October 22, 2010. Resident Individuals and HUFs (Hindu Undivided Families) are eligible for a deduction of Rs 20,000/- from one’s total income in a financial year under Section 80CCF of the Income Tax Act. This new section was introduced this year only and is effective from April 1, 2010. This deduction of Rs 20,000/- from total income is in addition to Rs 1.00 lakh deduction provided under Section 80C of the Income Tax Act.
(Please read the disclaimer at the end of the write-up.)
Salient Features of the Bond:
Minimum amount : Rs 10,000 and in multiples of Rs 5,000 thereafter
Maximum amount : nil
Maturity : 10 years
Lock-in-period : Five years
Buyback : After five years from the date of allotment
Issue opened on : September 30, 2010
Issues closes on : October 22, 2010
Who can apply : Resident individuals or HUFs
PAN Number : Investors should compulsorily provide PAN number
Demat a/c : If you are having a Demat account, bonds will be credited to
demat account & no physical bond will be issued. Alternatively, you have the option of asking physical bond certificate.
Applications available : At IDFC, Kotak Mahindra Bank, Citibank, Enam
Securities, HDFC Securities, Sharekhan, ICICI Securities,
Karvy Broking, Axis Bank, IDBI Bank, etc.
Rating : ‘LAAA’ by ICRA Limited
Listing : The bonds will be listed on BSE and NSE
Trading : Trading will be permitted on BSE and NSE after the
five-year lock-in-period
Tax benefit : Maximum Rs 20,000 for individuals and HUFs under
Section 80CCF of the IT Act
Issue Structure:
The Bonds under Tranche 1, with a maturity of ten years, will be issued in four series.
Series-1: Carry a 8% coupon, payable annually
Series-2: Cumulative option, 8% coupon, compounded annually
Series-3: Carry a 7.50 % coupon, payable annually; with a buyback option after five
years from the date of allotment
Series-4: Cumulative option, 7.50% coupon, compounded annually; with a buyback
option after five years from the date of allotment
Liquidity:
These infrastructure bonds have a maturity of 10 years. In that sense, they are long-term in nature. They have got a lock-in-period of five years. After completion of five years, the issuer, that is, IDFC will buy back the bonds. During the lock-in-period of five years, no loan facility will be available against the security of the bonds. Overall, the bonds are illiquid.
Suitability:
As investment of upto Rs 20,000 qualifies for tax incentive under a new Section 80C of the IT Act, investment of upto Rs 20,000 in these bonds will be attractive for individuals and HUFs in the highest tax bracket of 30%. The highest benefit will be for those in the tax bracket of 30%. These bonds are, however, beneficial for persons in 20% tax bracket also. Tax deduction at source (TDS) on the annual interest payable is not applicable to these bonds. However, interest income does not attract any tax incentive and will have to be added to one’s income and taxed as per one’s individual tax slab.
Knowledgeable investors with high risk appetite can avoid these infrastructure bonds as equities and equity-oriented mutual funds may fetch better returns provided one is locked in equities for a long-term horizon of five to 10 years.
Risk of default:
These bonds by IDFC are rated ‘LAAA’ by ICRA Limited. This is the highest credit quality rating by ICRA. As such, the risk of default is practically zero at this point of time. However, as the bonds are of long term nature, investors have to carefully analyze the risks involved in infrastructure financing. Reserve Bank of India had accorded infrastructure finance company (IFC) to IDFC in June 2010 and as a result IDFC will have to deploy 75% of its assets in infrastructure loans. IDFC is a non-banking financial company (NBFC) of good repute involved in infrastructure project finance. IDFC was originally promoted by Government of India, which now holds a 20% stake in it. The chairman of the company is Deepak Parekh and the MD & CEO is Rajiv Lall.
Other issues:
LIC, IFCI, IDFC and other NBFCs classified as Infrastructure Finance Company by RBI are allowed to issue these bonds, called Long Term Infrastructure Bonds. As such, more companies will be coming out with issues of such bonds that qualify for Rs 20,000/- deduction under Section 80CCF of the Income Tax Act.
Sources: http://www.idfc.com/
Disclaimer: The views of the author are personal. Please read the Issue Prospectus available at www.idfc.com carefully before investing.
Photo courtesy: IDFC
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