The recently introduced section 80 CCF for taxpayers, entitles an additional tax deduction to the extent of Rs 20,000 for investments in long term infrastructure bonds. This deduction, with effect from April 1, 2010, would be over and above the Rs. 1, 00,000 existing under section 80C.
Long Term Infrastructure Bonds from L&T
After the recent bond issue of IFCI and IDFC, L&T Infrastructure Finance Company Limited (or L&T Infra) is out with its public issue of bonds, under section 80CCF. This issue would be open for investment from October 15 to November 2, 2010. The proceeds of the issue would be utilized by the company for infrastructure lending, as defined by RBI.
Key Features of the Issue
Ø Who Can Apply
The L&T bond issue is applicable only for resident individuals and HUFs. NRIs, FIIs and OCBs are not eligible to participate in the issue.
Ø Credit Rating
The bond has been rated by two leading credit agencies of India. CARE has given a AA+ rating and ICRA has rated it LAA+. This high credit rating signifies timely servicing of the debt obligation at a low credit risk.
Ø Demat Account not a necessity
Investment in the L&T Bonds could be either in physical or in demat form, at the option of bondholders. However, there would be no TDS deduction for demat investments. For all investments in physical form, TDS would be deducted, if interest exceeds Rs.2, 500 p.a.
Ø Minimum application
The face value of each bond is Rs. 1,000. Applicants have to subscribe to a minimum of 5 bonds, either in the same series or across the different series offered.
Ø Lock-in Period and Maturity
The bonds have a lock-in period of 5 years and a maturity period of 10 years, from the date of allotment. All the bonds will be listed on NSE and can be traded after the initial lock-in of 5 years.
Bond holders could also mortgage or pledge their bonds for loans after the initial lock-in period. There is also a buyback option at the end of 5 years or 7 years.
Ø Different Series in the Bond Issue
There are four options available to suit different investor needs.
Series 1: Offers an interest rate of 7.75% p.a. with a buyback option after seven years. Interest is paid out annually to the investor. Thus, for an investment of Rs. 1,000 for 10 years, the maturity value would remain Rs. 1,000.
Series 2: The interest rate is 7.75% p.a., with a buy back after 7 years, similar to series 1. However, the interest is compounded annually and proceeds are paid only on maturity.
Series 3: This series offers an interest rate of 7.5% p.a. with a buyback option available after 5 years. The interest is paid out annually to investors.
Series 4: Interest rate offered is 7.5% p.a. with a buyback option available after 5 years. Interest is compounded annually and the proceeds are paid only on maturity.
Ø Yield Post Tax
Although the bond offers an interest rate of 7.5% or 7.75%, the tax benefit on the bond increases the effective net yield on maturity.
For an investment of Rs. 20,000, assuming a marginal tax rate of 30.9 %( highest tax bracket), a tax of Rs. 6,180 could be saved. Thus, the net effective investment would be Rs 13,820(Rs. 20,000- Rs.6, 180). Similarly for a tax rate of 20.6% and 10.3%, effective investment would be Rs. 15,880 and Rs.17, 940 respectively. The effective yield post tax has been illustrated below.
| Tax Rate | Effective Investment | Series 1 | Series 2 | Series 3 | Series 4 |
| Yield on Maturity(with Tax Benefit) |
| 10.3% | 17940 | 9.38% | 8.93% | 9.11% | 8.67% |
| 20.6% | 15880 | 11.29% | 10.26% | 11.00% | 10.01% |
| 30.9% | 13820 | 13.58% | 11.81% | 13.25% | 11.55% |
| Yield on Buy Back(with Tax Benefit) |
| 10.3% | 17940 | 9.86% | 9.44% | 10.23% | 9.86% |
| 20.6% | 15880 | 12.31% | 11.36% | 13.42% | 12.58% |
| 30.9% | 13820 | 15.23% | 13.59% | 17.20% | 15.75% |
*Source: L&T Infra Tax Saving Bonds 2010 Prospectus
Ø Application Process
Application forms could be obtained and submitted at the following banks*, which serve as collection centres for investors.
· Axis Bank, · DBS Bank, · HDFC Bank, · HSBC Bank, · ICICI Bank, · IDBI Bank, · ING Bank, · SBI Bank
*Refer L&T’s website http://www.ltinfrabond.com/contact.php to locate the branch closest to you.
Alternatively online applications could be submitted, if you have an online trading account with any one of the following brokers. In this case, allotment of the bond will be credited to your demat account.
· Kotak Securities, · SHCIL Services, · RR Equity Brokers, · IDBI Capital Market Services, · Anand Rathi Share & Stock Brokers, · SMC Global Securities, · ICICI Securities, · HDFC Securities, · Reliance Securities, · Enam Securities, · Standard Chartered-STCI capital Markets, · Edelweiss Securities, · Almondz Global Securities
Issue at a glance
*Source: L&T Infra Tax Saving Bonds 2010 Prospectus
Written for InvestmentYogi by Ramya Ramachandran
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