Capitalmind
Capitalmind
Actionable insights on equities, fixed-income, macros and personal finance Start 14-Days Free Trial
Actionable investing insights Get Free Trial
Fixed Income

IFCI Infra Bonds: Saves You Tax Too

IFCI has some infrastructure bonds open for purchase, and they give you a tax exemption on a limit of 20,000 per year.

Scheme: http://www.ifciltd.com/Portals/0/IFCI%20Infra%20Bond%20Series%20I_IM_web.pdf

10 year bond, with no exit till five years, but will trade on the BSE – but you can’t exit before 5 years are over. Purchasing these bonds on the BSE is unlikely to provide the same tax benefit (it probably only applies for a purchase directly from IDFC, a primary purchase – not secondary purchases). To be honest it all depends on when they list the bonds and whether on listing such bonds will still have a lock-in etc. 

Rates: 7.85% if you want to sell them back after 5 years, 7.95% otherwise.

Options: Cumulative (interest reinvested annually) or Annual Interest Payout.

Issue Closes: August 31, 2010. You have a week from today.

Issue details: http://www.ifciltd.com/IFCIBonds/InfrastructureBonds/Issue201011/tabid/212/Default.aspx

You need a demat account. Business standard says no harm waiting for other such bond offers for the 20K tax benefit.

Let’s now analyze the non cumulative schemes.

If you’re in the 30.9% tax bracket, investing 20K will save you Rs. 6,180 in tax in the first year, and give you Rs. 1570 in taxable interest, which means a net income of Rs. 1,085 per year. Over five years that’s a total return of 11,604 or about 10% a year, which is nice. Unfortunately the Rs. 20,000 cap on the tax exemption makes it uninteresting for the people in the 30% bracket.

At the 20% bracket the net return, calculated the same way, is 10,352 or 10.35% per year. For the 10% tax bracket it means about 9.1% net yield per year. (Net yield = total interest/investment)

At the cumulative option interest goes to 12.92% net yield per year, which is definitely very interesting. I might be tempted to wait for more as the year goes by, but to people in the 20% tax bracket this could be invested in immediately, with say 10K (leave the rest for a later offering).

Update: There is an awesome comment by reader Kaho Pyare, who specifies that the return is higher because you can reduce the tax from the investment amount. For someone in the 30% bracket, the cumulative option works out to a return of 13.77%, since your investment is about 13,820 (20K minus the tax benefit) and the return after five years post tax is 26,345. Just don’t overpay taxes.

The absolute amounts are small for the 30% bracket (>8 lakhs a year) and perhaps only marginally more significant at the 20% bracket (>5L). It does make sense at the 10% bracket, surely, even if calculated returns are just 9.5% net of taxes over five years.

This isn’t investment advice, just my opinion.

divider

Subscribe to Capital Mind:

To subscribe to new posts by email, once a day, delivered to your Inbox:

[wysija_form id=”1″]

Also, do check out Capital Mind Premium , where we provide high
quality analysis on macro, fixed income and stocks. Also see our
portfolio which has given stellar returns in our year, trade by trade
as we progress. Take a 30-day trial:

[wysija_form id=”2″]

  • kaho pyare says:

    >looks like post done in lot of hurry. lot of mistakes in calculation. i will do for cumulative one

    30% tax bracket
    because of tax saving their effective investment will be 13820 only. you will get 20*(1.0785)^5 i.e. 29183 (pretax) after 5 years. post tax it will be 20+9183*.691 i.e 26345. so you are almost doubleing your money in 5 years and interst work out to be 13.77% compounded pa.

    also it will work out bad for 20% bracket people since their effective investment will be 20*.794=15880. for them post tax return will be
    11.43% compounded pa

  • Deepak Shenoy says:

    >Kaho pyare: What I did was simply take the money saved in taxes and assumed that was the return – but what you do makes more sense, to reduce the tax from the amount and assume that as the investment. Only works if you don't overpay taxes (or your company doesn't)!

    For the cumulative option, then, you get what you're talking about though there's an issue with taxes having to be paid every year while the rest of the capital goes cumulative. Still the return as you said is 13.77% compounded. In absolute terms it's about 12.5K, over five years – or 2.5K per year, or Rs. 200 per month whcih is probably of little consequence to the person earning more than 8 lakhs per year?

    For the non cumulative option it's about 13% for the 30% bracket people.

    At 20% the return is around 11% calculated this way, which may perhaps be nicer to someone earning between 5 and 8L.

    For the 10% bracket it comes to 8.55%/9.5%, which at the 1.6L to 5L bracket is probably worth the while.

    For the cumulative option you're

  • Srikanth says:

    >Dude, this issue is from IFCI, which is like a whole different company from IDFC 🙂

    http://www.idfc.com/
    http://www.ifciltd.com/

    I'm sure IDFC is also prepping for such a bond, however. Not yet out…

  • Deepak Shenoy says:

    >FRIK! Thanks Srikanth! Have to fix. Can't believe I made that stupid a mistake. Really. Sorry.

  • Vijay Hiraman Marathe says:

    I have purchased IFCI LIMITED bond of Rs.20,000 on 21.03.2012 Form No. 2112477 but till date i have not recived the Bond. You are requested to look into the same.
    Regards,
    V.H.Marathe
    09921834510