L&T IFC – Larsen & Toubro Infrastructure Finance Company Limited has come up with new IPO of Long term Infrastructure Bonds that are available to the public between January 10th and February 11th of 2012. The purpose of this post is to raise awarness among people on these Infrastructure Bonds and the tax benefits they bring to us.
What are Infrastructure Bonds?
Infrastructure Bonds or Infra Bonds as they are shortly called are special Bonds that are issued by Banks in India to fund the rapid growth of the Infrastructure Industry in India. In one of my earlier posts titled “Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits“ we had taken a detailed look at them. You can revisit that post to know more about these bonds by Clicking Here
Coming back to the topic, lets focus on these new Infrastructure bonds issued by IDFC now.
Details of the Issue:
Issue Start Date: January 10, 2012
Issue End Date: February 11, 2012
Issue Size: 570 Crores (Max)
Bond Face Value: Rs. 1000/- per bond
Minimum Purchase Amount: Rs. 5,000/- (5 Bonds)
Type of holding: DEMAT (You can only Apply online through your DEMAT website like icicidirect)
Rate of Interest: 8.7% p.a
Interest Payment Options: Annual or Cumulative
Maturity Date: 10 years from the Date of Allotment
Maturity Amount: Rs. 2303.01 per Bond at the end of 10 years
Lock-in Period: 5 years
Buyback Facility: Available at the end of 5 years One day from the Date of Allotment and at the end of 7 years and One day from the Date of Allotment
First things first – What are the Tax Benefits of Investing in these Bonds?
These long-term infrastructure bonds are useful to claim tax relief of up to Rs. 20,000/- under the Section 80CCF of the Indian Income Tax. i.e., If you buy 20 bonds of Rs. 1000/- each, that Rs. 20,000/- you invested in these bonds is exempt from your taxable salary.
So, for people in the highest tax slab the tax benefit they get is: Rs. 6,180/-
About L&T IFC Ltd:
Larsen & Toubro (L&T) is one of India’s largest Infrastructure & conscturctions. L&T IFC is a part of the L&T group and finances the funding of Infrastructure Projects around India. It was established in the year 2006 with their head office in Mumbai India. It is one of the Fast growing Infrastructure financing company’s in India.
About this Bond Issue:
This Bond Issue by L&T IFC has been rated as “AA+“ by ICRA and CARE India. As you might already know, AA+ is a very good rating any Issue can get and this Infra Bond’s issue by L&T IFC has got the same. So, this makes it an Excellent Investment Option.
Interest Payment Options:
This Bond Issue has two modes of Interest Payment.
1. Annual Interest Payout
2. Cumulative Interest Payout
In the Annual option, the Interest amount earned in the year (Rs. 435/- on a Rs. 5,000/- Investment) will be paid out every year to the Investor. At the end of 10 years, your initial investment of Rs. 5000/- will be returned.
In case of the Cumulative option, the Interest is compounded every year and the total cumulative amount will be paid out at Maturity. The amount in this case for a Rs.5000/- Investment would be Rs. 11,515/-
About the Buy-Back Facility:
L&T IFC has indicated that Buy-Back Facility will be available after the day when 5 years and 1 day or 7 years and 1 day from the date of allotment of the bond completes. At that time, L&T IFC will buy-back these Bonds at the below mentioned prices if you are willing to sell.
Cumulative Interest Payout Option: Rs. 7587.85/- per bond at the end of 5 years
Cumulative Interest Payout Option: Rs. 8965.55/- per bond at the end of 7 years
Annual Interest Payout Option: Rs. 5000/- per bond
Dont forget the fact that L&T IFC has paid you an Interest of Rs. 435/- every year whereas for the Cumulative Interest Payout Option, nothing was paid to the Investor. So, his amount is bound to be highers than the amount for the Annual Interest Payout Investor.
Note: The amount above is if you surrender your bond for buy-back at the end of exactly 5 years and 1 day or 7 years and 1 day. If you wish to surrender anytime later, the amount might vary based on the duration.
Salient Features of the Issue:
1. Investments of upto Rs. 20,000/- are exempt from Income Tax under Sec 80CCF thereby saving Rs. 6180/- for Investors who fall in the highest tax slab of 30%. For someone in the 20% tax slab it would be Rs. 4120/- and for someone in the 10% tax slab the tax saving would be Rs. 2060/- respectively
2. Interest Rate of 8.7% applicable for both annual and cumulative interest payout options
3. Buy-Back available after 5 years & y years. So, if you have better investment opportunities at the end of 5 or 7 years, you can sell them to L&T IFC and use the money to invest somewhere else
4. Minimum Investment is only Rs. 5,000/-
5. AA+ rated Issue which means very good Safety & Security.
Some Questions that Might Arise in your mind about this issue – Answered:
1. Is the Annual Interest Payout better or the Cumulative one?
I would say Cumulative because, the total interest earned in case of the cumulative payout (due to the interest compounding) will be superior to the annual payout option
2. How Safe is my Money if I invest in this scheme?
Your money is very safe. As per the bond issue details, the company (L&T IFC) will maintain an asset cover of atleast 75% of the outstanding bonds in the market up until all the bonds are fully redeemed. So, even in the case of the company going bankrupt, the Supervisory bodies will have assets to liquidate and payout atleast 75% of the money to all the investors. That is why the AA+ Rating. However, considering the size of the company and the size of the issue, the chances of this are very low.
3. What will this money be used for?
The money raised through this bond IPO will be used to fund and finance Infrastructure Projects in India.
4. Is Buy-Back the only option for me to sell these bonds after the lock-in period of 5 years?
No. The bonds will be listed in the BSE at the end of 5 years and can be bought and sold in the exchange
5. Can NRI’s Invest in these Bonds?
No. This issue is available only for Resident Indians. NRI’s cannot invest in these Bonds
In terms of the Issue, it is AA+ rated, so safety is not a big problem. It is issued by one of India’s large financial institutions that is backed by one of India’s largest Infra company‘s. So, it looks like a sound investment decision. But, The Final Verdict depends on which Tax Slab you are in.
For someone in 30% Tax Slab: Excellent Opportunity to Save an Extra Rs. 6180/- Tax and enjoy good returns that work out to roughly 15% if we include the Tax Benefit earned along with the 8.7% interest offered by L&T IFC. So STRONG BUY.
For Someone in 20% Tax Slab: Great Opportunity to Save an Extra Rs. 4120/- Tax and enjoy good returns that work out to roughly 12% if we include the Tax Benefit earned along with the 8.7% interest offered by L&T IFC. So GOOD BUY.
For Someone in the 10% Tax Slab: Good Opportunity to Save an Extra Rs. 2060/- Tax and enjoy good returns that work out to roughly 10% if we include the Tax Benefit earned along with the 8.7% interest offered by L&T IFC. So BUY.
Happy Tax Saving!!!