Infrastructure Bond for Tax Saving - Analysis and Review

Recently Religare organized a camp in my office campus for selling the IFCI Infrastructure bonds which are a type of the new tax relief instrument from Govt. upto  A 20000.


I came across a nice article here with detailed analysis of the new tax relief instrument.
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IFCI Infra bond plan:


IFCI Tax Exemption Long Term Infrastructure Bonds
Issuer IFCI LimitedOffering 1,00,000 Unsecured, Redeemable, Non-Convertible, Taxable Bonds of Rs. 5,000/- each aggregating to Rs. 50 Crore with a green-shoe option to retain over-subscription for issuance of additional Infrastructure BondsType Private Placement basisInstrument Unsecured, Redeemable, Non-Convertible, Taxable Bonds having benefits under section 80 CCF of the Income Tax, 1961 for long term Infrastructure BondsRating BWR AA- by BRICKWORK RATINGS INDIA PVT LIMITEDEligible Investors Resident Indian Individual (Major) and HUF through Karta of the HUFSecurity UnsecuredFace Value Rs. 5,000/- per bondIssue Price At par (Rs. 5,000/- per bond)Minimum Subscription 1 Bond and in multiples of 1 Bond thereafter,Tenure 10 years, with or without buyback option after five yearsOptions for Subscription
The Bonds are proposed to provide the following options-
• Option I – Non-cumulative and Buyback after 5 years
• Option II – Cumulative and Buyback after 5 years
• Option III – Non-cumulative and no Buyback
• Option IV – Cumulative and no Buyback
Redemption / Maturity
At par at the end of 10th year from the deemed date of allotment. For Cumulative Option, at par with cumulated interest thereon.
Coupon rate
• Option I & II- 7.85% p.a.
• Option III & IV – 7.95% p.a.
In case of cumulative bonds, interest shall be compounded annually
Listing Proposed to be listed on BSETrustee Axis Trustee Services LimitedDepository National Securities Depository Ltd. and Central Depository Services (India) Ltd.Registrars Beetal Financial & Computer Services (P) Ltd.Mode of Payment
Interest payment will be made through ECS/At Par Cheques/Demand Drafts
Issuance Demat form onlyTrading Demat mode onlyIssue Open Date August 9, 2010Issue Close Date August 31, 2010
• The issuer would have an option to pre-close the issue by giving 1 day notice to the Arrangers
Deemed Date of Allotment September 15, 2010



Here is the article from Rediff business:


One of the fresh tax reliefs in the Budget 2010 is the deduction allowed for investing up to Rs 20,000 in infrastructure bonds.


Many media articles and the finance minister have said that this is a very positive thing. But how can the same thing be positive for every individual? If not negative, it should at least be neutral for many. Else life would be so boring.
This article will try to look the pros and cons of investing in infrastructure bonds for the sake of tax-saving. The analysis will be from the perspective of the different 'tax groups' post Budget 2010.
  • Tax group 1: Taxable income Rs 1.6 lakh to A5 lakh.
  • Tax group 2: Taxable income Rs 5 lakh to Rs 8 lakh.
  • Tax group 3: Taxable income above Rs 8 lakh.
To understand the pros and cons of any tax-saving investment, we need to look at four major parameters:
  • Actual tax-saving (let's take the highest saving possible);
  • Returns from the investment (during the lock-in period at the least);
  • Opportunity cost (what if the same money had been invested in some other investment?); and
  • Effect of Inflation on the returns on investment (what would the worth of your investment be when it comes to redeem/encash it?).
Assumptions
For the sake of parameter 2, we will have to make an assumption on the lock-in period (as nothing has so far been announced by the finance minister). As is generally the case with most tax-saving instruments we can assume two scenarios -- a 3-year lock-in and a 5-year lock-in.
Let's assume the rate of return on infrastructure bonds = 5.5% per annum.
Let's consider the overall rate of inflation at 8%.
For people in the Rs 1.6-5 lakh taxable income group, income will be taxed at the rate of 10%.
Parameter 1: Actual tax-saving: 10% of Rs 20,000 = Rs 2,000 (if you invest Rs 20,000 in the instrument you get to reduce your taxable income by Rs 20,000 thus giving a 10 per cent benefit).
Parameter 2: What will be the returns at the end of the lock-in period? For a lock-in period of 3 years an investment of Rs 20,000 would fetch an income of Rs 3,484. When added to the tax saved we get an effective return of Rs 25,485 (Rs 20,000 + Rs 3,484 + Rs 2,000) on our investment.
Parameter 3: If this same amount were to be invested in a market instrument that fetched a return of 15% (which is very reasonable considering that the benchmark Sensex and many mutual funds have given comparatively higher returns over a long period), the investment would fetch an effective return of Rs 27,376 (Rs 20,000 - Rs 2000 = Rs 18,000 invested @15% per annum for 3 years).
Parameter 4: What would be the minimum amount required to counter inflation at 8%? The amount would be Rs 25,194.
Thus we see that for a person in the Rs 1.6-5 lakh slab, the benefit from investing in an infrastructure bond as a tax-saving instrument will be only Rs 291 (Rs 25,485 - Rs 25,194) whereas the benefit from paying tax and investing the balance in any decent instrument would be Rs 2,182.
Similarly, we can calculate the benefits for each segment as well as for a scenario where the lock-in period is 5 years as given in the table below.
Rate of tax 
Investments in Infrastructure Bonds
Tax paid in lieu of investing in Infrastructure Bonds
Slab
Tax-savings
Effective Returns
Investment Returns from Market after Tax
3 years
5 years
3 years
5 years
30%
6,000
29,485
32,139
21,292
 28,159
20%
4,000
27,485
30,139
24,334
 32,182
10%
2,000
 25,485
28,139
27,376
 36,204
Required Returns to Counter Inflation Effect
 25,194
29,387
The bottomline
As seen from the table above, it makes sense for people in the over Rs 8 lakh taxable income slab to use the infrastructure bonds as a tax-saving instrument.
For the people in the Rs 5-8 lakh bracket, it would be advisable to invest in infrastructure bonds if the period of investment is 3 years, but not for five years and for those in the Rs 1.6-5 lakh bracket, it would be an absolute no-no to invest in Infrastructure Bonds for tax-saving purpose.
Note: The above example was calculated at a interest rate of 5.5%. IFCI offers a rate of 7.85 - 7.95%. From the calculation it seems like it's not a bad idea to go for the plan for 1.6-5 lacs taxable income group as well.

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