Thursday, January 19, 2012

IDFC Long Term Infrastructure Bonds: 2011 – 2012 – Tranche 2

IDFC – Infrastructure Development Finance Company Limited has come up with new IPO of Long term Infrastructure Bonds that are available to the public between January 11th and February 25th 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 11, 2012
Issue End Date: February 25, 2012
Issue Size: 4400 Crores (Max)
Bond Face Value: Rs. 5000/- per bond
Minimum Purchase Amount: Rs. 10,000/- (2 Bonds)
Type of holding: Physical & DEMAT (You can 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
Lock-in Period: 5 years
Buyback Facility: Available at the end of 5 years 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 4 bonds of Rs. 5000/- 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 IDFC Ltd:

Infrastructure Development Finance Corporation Ltd (IDFC) is one of India’s largest financial institutions. It was established in the year 1997 and got listed in the Indian Stock Exchanges in August 2005. RBI classifies IDFC as an Infrastructure Financing Company and they are one of the premier institutions that finance Infrastructure Growth in India.

About this Bond Issue:

This Bond Issue by IDFC has been rated as “AAA“ by ICRA and Fitch India. As you might already know, AAA is the best possible rating any Issue can get and this Infra Bond’s issue by IDFC has got the same. So, this makes it a Prime 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:

IDFC has indicated that Buy-Back Facility will be available after the day when 5 years and 1 day from the date of allotment of the bond completes. At that time, IDFC will buy-back these Bonds at the below mentioned prices if you are willing to sell.

Cumulative Interest Payout Option: Rs. 7590/- per bond
Annual Interest Payout Option: Rs. 5000/- per bond

Dont forget the fact that IDFC 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. 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. So, if you have better investment opportunities at the end of 5 years, you can sell them to IDFC and use the money to invest somewhere else
4. Minimum Investment is only Rs. 10,000/-
5. You can hold the Bonds in both Physical as well as DEMAT form
6. AAA rated Issue which means superb 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 amount earned at the end of 10 years for a Rs. 5000/- bond in case of Annual payout is Rs. 9350/- (Including the 10 time payment of Rs. 435/- every year) whereas in case of Cumulative payout it is Rs. 11,515/- As you can see, in case of cumulative payout the amount earned is high (due to compounding of interest)

2. How Safe is my Money if I invest in this scheme?
Your money is fully safe. As per the bond issue details, the company (IDFC) will maintain an asset cover of atleast 100% 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 enough assets to liquidate and payout all the investors. That is why the AAA Rating.

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 NSE or 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

Final Verdict:

In terms of the Issue, it is AAA rated, so safety is not a problem. It is issued by one of India’s premier financial institutions. 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 IDFC. 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 IDFC. 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 IDFC. So BUY.

Happy Tax Saving!!!

1 comment:

  1. Thank you for the precise post which helped me clarify all my queries related to IDFC infra bonds.


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