Long-term infrastructure bonds are finally here. Those waiting to avail the additional Rs 20,000 deduction under section 80CCF of the Income-tax Act (apart from the Rs 1 lakh deduction under section 80C) this year can take their pick from the two infrastructure bonds that are now open for subscription.
Infrastructure bonds from Power Finance Corp. Ltd (PFC), a government-owned company, and Industrial Finance Corp. of India (IFCI) Ltd are open till 4 November and 14 November, respectively.
Graphics by Ahmed Raza Khan; illustration by Shyamal Banerjee/Mint
Similarities: Both the bonds have many similar features. The bonds come with two maturity tenors—10 and 15 years. The rates offered are 8.5% and 8.75% per annum for tenors of 10 and 15 years, respectively.
The minimum investment is Rs 5,000, which is also the face value per bond. You can buy in multiples of Rs 5,000 thereafter. Both PFC and IFCI bonds provide the annual and cumulative options of interest payment for both maturity tenors.
Also See | Common Features (PDF)
The bonds would be listed on the stock exchanges and you can trade the same once the lock-in-period of five years is over.
Differences: But there are some differences as well. Both PFC and IFCI bond are offering a buy-back option (put option), which empowers investors to sell it back to the issuer. Generally, in a rising interest rate scenario, exercising the put option turns out to be beneficial for investors.
However, the time period after which investors can tender their shares is different with both companies. PFC investors can sell back 10-year bonds at the end of five years; 15-year bonds can be sold back to the company at the end of seven years. IFCI investors can do so at the end of five or seven years for 10-year bonds and at the end of seven, 10 or 12 years for 15-year bonds.
The other difference is the credit rating. While, PFC bonds have been assigned a rating of “AAA/stable” by Crisil Ltd and “AAA” with a stable outlook by Icra Ltd, IFCI bonds have been assigned “BWR AA-” by Brickwork Ratings India Pvt. Ltd, “CARE A+” by CARE (Credit Analysis and Research Ltd) and “LA” by Icra.
“The government notification has capped the yield on infrastructure bonds to the yield on government securities of corresponding residual maturity, as reported by Fixed Income Money Market and Derivatives Association of India (a voluntary market body for the bond, money and derivatives markets) as on the last working day of the month immediately preceding the month of issue. IFCI’s issue opened in September and the yields for 10- and 15-year government securities at end of August were 8.50% and 8.76%, respectively,” says Atul K. Rai, chief executive officer and managing director, IFCI.
How do you subscribe?
You can invest individually or jointly in both PFC and IFCI bonds, either in dematerialized form or in physical form.
If you wish to invest in dematerialized form, all you need to do is fill in the application form and provide details of your demat account along with a copy of your Permanent Account Number (PAN) card. You would also be required to issue a cheque favouring the company. If you are investing in physical form, you need to attach copies of your PAN card, residence proof and provide bank account details along with the application form.
What do you get?
If you are investing Rs 20,000 under the cumulative option of any of these bonds for 10 years, you would get Rs 45,220 at the end of the term; invest the same amount for 15 years and you get Rs 70,384.
If you exercise put option in PFC bonds: If you have invested Rs 20,000 for 10 years in the cumulative plan of PFC and you exercise the buy-back option at the end of five years, you would get Rs 30,076. In the same example, extend the tenor to 15 years and buy back at the end of 10 years and your corpus would be Rs 46,276.
If you exercise put option in IFCI bonds: An investment of Rs 20,000 would grow to Rs 30,076 if you exercise the buy-back option at the end of five year for 10-year bonds with the cumulative option. The corpus would stand at Rs 35,404 if buy-back is exercised at the end of seven years.
In case you invest Rs 20,000 for 15 years in the cumulative option, your corpus would stand at Rs 35,980, Rs 46,276 and Rs 54,728 if you sell back bonds at the end of seven, 10 and 12 years, respectively.
Post-tax returns: Bonds follow the exempt-exempt-tax (EET) principle for taxation purposes. This means the maturity proceeds are taxable. However, you get a deduction in the beginning.
Taking into account the deduction you get and the tax you pay on the maturity, post-tax returns work out to be 8.69% and 7.08% for 10 years and 15 years, respectively, if you are in the highest tax bracket of 30.9%. If you are in the 20.6% tax bracket, the net return works out to be 8.75% and 7.41% over 10 and 15 years, respectively. In the lowest tax bracket of 10.3%, the net return would come to 8.68% and 7.66% over 10 and 15 years, respectively.
Which works better?
Both the companies are offering the same rate of interest, but PFC has better ratings than IFCI. The ratings are based on company financials and other parameters. Higher the ratings, the safer is the investments Moreover, PFC is a government-owned company and is unlikely to default.
What works in favour of IFCI is that the option to sell back the bonds to the company comes frequently.
What should you do?
A post-tax return of around 8.7% over a 10-year infrastructure bond is better than the post-tax returns offered by bank deposits of the same tenor. Currently, the interest rates for 10-year bank deposits are around 9.25%, their post-tax returns would be about 6.39-8.29%. However, a 5-year fixed deposit, which will also give deduction benefits, is giving around 9.25% currently and if you invest Rs 20,000 for five years, you get around Rs 31,200 compared with Rs 30,000 you would get in 10-year bonds.
However, over the term of 15 years, the bonds lag behind Public Provident Fund (PPF), which enjoys the exempt-exempt-exempt (EEE) status, in terms of post-tax returns. “One should invest Rs 20,000 in infrastructure bonds only if he has already invested Rs 70,000 in PPF, which remains the best tax-saving instrument,” says Surya Bhatia, certified financial planner and principal consultant, Asset Managers.
If you invest in demat, you would be able to sell any time after the lock-in period. However, for all practical purposes, this may be difficult owing to low volumes in the bond market.