IDFC Infrastructure Bonds open for a limited period: INVEST if you are in the upper tax bracket

Sep 30, 2010

In the last budget, FM Pranab Mukherjee had allowed Investors to invest additional Rs. 20,000 over & above Rs. 1 lac that one is usually allowed u/s 80C to claim deductions. Hence, this (FY 2010-11) is the only financial year in which one can invest Rs. 1.20 lacs per Income Tax file & avail additional deduction.
The extra deduction of up to 20,000 is allowed u/s 80CCF if one invests in govt. specified Infrastructure Bonds to be issued by Infrastructure NBFCs like IFCI, IDFC, etc. Further, these bonds shall remain open for a specified  time period only. IFCI had last month come out with its Infra bonds & the issue is closed now. 

IDFC Infrastructure Bonds issue opens tom on 30th September 2010 & shall remain open for subscription till Oct 18th 2010 only.

The bonds have a tenure of 10 years & expected yield of 7.5 % pa or 8.0% pa depending on the option chosen. 

Who can Invest? Individuals & HUF only;    

What you need to Invest? PAN no. & a Demat Account 

(although we believe that making demat compulsory is an unnecessary requirement as one may want to Invest for all members in the family but they might not have a demat account; opening a demat for the sole purpose of investing in these bonds is not advised as it adds to the cost.Also, HUFs rarely have a demat account)

There are four option to choose from:

Bond TypeInterest RateTenureBuyback Option
Bond Series 18.0 % pa annual interest10 yearsNo
Bond Series 28.0 % pa cumulative interest; compounded annually10 yearsNo
Bond Series 37.5 % pa annual interest10 yearsYes; after 5 years
Bond Series 47.5% pa cumulative interest; compounded annually10 yearsYes; after 5 years

Analysis & Comments
Any investor who is in the 30% tax bracket, should subscribe to these bonds as it will result in total tax savings of approx. Rs. 36,000 this financial year (30% of Rs. 1.20 lac; surcharge & cess excluded).

The yield under various options are explained in the table below:

Tax BracketTax Adjusted Yield to Investors
Your Tax bracketEffective Tax Rates (%)Series 1 (%)Series 2 (%)Series 3 (%)**Series 4 (%)**
30%30.9%13.89 %12.06%17.19%15.74%

**yield calculated assuming buyback at the end of 5 years.

So if you are in the highest tax bracket and have already exhausted the limit of Rs. 100,000 u/s 80C, then it makes sense to invest the maximum amount of Rs. 20,000 in these bonds. We would suggest option 3 so as to net a yield of 17.19% in 5 years. Go for the buyback option that has a lock-in for 5 years only.


2 thoughts on “IDFC Infrastructure Bonds open for a limited period: INVEST”


    IDFC’s long-term infrastructure bonds, appears enticing only from a tax planning perspective, as an investment upto Rs 20,000 will be eligible for an additional (over and above Rs 1,00,000 benefit limit available under section 80C, 80CCC and 80 CCD of the Income Tax Act, 1961) tax benefit.


    Yes I agree with you Vishal. And we always emphasize that MUTUAL FUNDS are your best bets as far as Investments are concerned. But a tax saving approx. Rs. 6,000 cannot be ignored all together. And we have specifically mentioned that invest in these bonds if you are in the highest tax bracket , in the title itself. Thanks for your comments anyways.
    Nirav Panchmatia

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