IDFC Infrastructure Bonds – Second Tranche to open from January 17, 2011

IDFC has come out with its second tranche of infrastructure bonds.  It will be open for subscription from January 17, 2011 till February 4, 2011.  The issue size is little below Rs. 3000 crores.  This time the options available are reduced to 2 as against the last time when 4 options were available.  This issue is similar to Series 1 and Series 2 of IDFC First Tranche Issue offering 8% interest rate for a period of 10 years with a buy back option at the end of 5 years.  Upto Rs 20,000 invested in these bonds is eligible for deduction while computing taxable income under section 80CCF of the Income Tax Act.  This is over and above Rs. 1,00,000 benefit available under section 80C.

To read more about these bonds, refer to the earlier posts on IDFC Bonds - First Trance Issue (here & here).  Please note that option of Series 3 and Series 4 is not available this time.

This is a good time to invest in tax-savings infrastructure bonds for those who have not yet made the investment in earlier issues of IDFC, IL&FS and L&T Infrastructure.   

To clear your doubts on the mystery of high tax-adjusted yields advertised by these companies, do read this article on whether such yields are really true?

Endnote:  This post is an update on the blog after nearly a month on no activity.  My apologizes for the same.  I will try to post one more article by the end of this month and regular posting will start from the month of February.  Thank you for bearing this and keep visiting this blog.

IDFC Infrastructure Bonds - Correction

In my earlier post on IDFC Infrastructure Bonds, the tax adjusted yield was incorrectly calculated.

The effective yield for an individual in 30.90% tax slab is as follows:

Series	Coupon Rate	Tax Adjusted Yield
Series 1	8.00%	13.90%
Series 2	8.00%	12.07%
Series 3	7.50%	17.85%
Series 4	7.50%	15.75%

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Tax adjusted yield for Series 3 & 4 is assuming buyback at the end of 5th year.

Infrastructure Bonds - IDFC

Recently IDFC announced public issue of long term infrastructure bonds up to Rs. 3400 crores. These bonds are classified as “long term infrastructure bonds” and are issued under terms of Section 80CCF of the Income Tax Act. Thus investment in these bonds will be eligible for deduction equivalent to the amount invested, subject to maximum of Rs. 20000, from the taxable income. This deduction is over and above Rs. 1,00,000 deduction available under Section 80C.

Issue Details:

The bonds will be issued in four series:

Series	Interest Rate	Interest Pymt.	Buyback Option
Series 1	8.00%	Annually	No
Series 2	8.00%	Cumulative	No
Series 3	7.50%	Annually	Yes
Series 4	7.50%	Cumulative	Yes

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The bonds have the lock in of five years and are proposed to be listed on NSE and BSE on which they can be traded after the lock-in period.  Buy-back option is available after 5 years.  They are fully secured and are rated LAAA by ICRA, indicating highest level of safety.  Interest received is taxable as interest receipts.

The issue is open for subscription from September 30, 2010 till October 18, 2010. It seems to be on first come first serve basis and it is advisable to invest early, in case one is planning to do so.

How to invest?

As per the prospectus, the application forms can be obtained from the company, lead managers, lead brokers or any other broker who is the member of BSE and NSE. Hence it seems that you can get the application forms from your neighbourhood broker.

Whether to invest in this?

The investment gives tax deduction to the extent of principal investment, subject to maximum of Rs. 20,000. Taking the tax benefit in to account, the effective interest rates becomes attractive.

Series	Coupon Rate	Effective Interest Rate*
Series 1	8.00%	11.58%
Series 2	8.00%	11.58%
Series 3	7.50%	10.85%
Series 4	7.50%	10.85%

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*Assuming tax slab of 30.90%

IFCI had earlier issued similar bonds in August 2010 and their coupon rate was 7.85% (with buyback option) and 7.95% (without buyback option). Besides, IFCI and IDFC, LIC & L&T Infrastructure are also planning to raise funds through such bonds. The interest rates for such bonds must be in line with government security of similar maturities and since interest rates are expected to rise in next 6 months horizon, the coupon rate of future issuers may be a slightly higher than IDFC and IFCI issues. However, the difference may not be much.

One must avail Section 80CCF benefit of Rs. 20,000. He may think of investing the entire Rs. 20,000 in one issue or can split it between two issuers.