As promised this is a post on the currently available Infrastructure bonds in the market from L&T and IIFCL. This is in continuation on my series on Tax Savings and 2 earlier posts on the similar topic, one post on the IDFC Infrastructure bonds and another on Tax planning in the current financial year.
In my IDFC post I mentioned that we will have more such issues and the rate of interest could be better that the same. Let us see my prediction is true. Before that let us look at what is the purpose of Infrastructure bonds.
Infrastructure bonds are issued by government approved companies with the purpose of raising funds to invest in infrastructure projects e.g. Dams, Power Plants, Roads, Bridges, Ports etc. Since these projects have a long gestation period and a low payback with a humongous amount of capital requirement, government gives certain tax benefits to people who are willing to invest in these bonds.
A major feature/advantage of these bonds is that the tax exemption for these bonds is over and above the 100000/- INR limit available for the normal tax instruments. With Infrastructure bonds your tax exempt investment limit increases to 120000/- Rupees.
So if you have not exhausted your 1lakh limit you need not read any further except for pure academic interest.
If you have used your 1Lakh limit you can invest further in Infrastructure bonds.
Now your logical question is why in these bonds and why not continue to invest in your conventional instruments like say LIC, PPF etc. Well the reason for same is even if you invest more than 1L in conventional instrument you will not get any incremental tax savings unless you are investing in Infrastructure bonds, and that limit is 20K currently.
Now let us go to the next question which company’s bond to choose L&T or IIFCL, well even if one does not have to do any analysis and simplest distinction will be on the basis of ownership. L&T is a private company and IIFCL is government so if you are not comfortable with a private company go for IIFCL but if you are worried about the laid back customer service go to L&T. But alas life is not so simples so let us do some more analysis.
We will compare following things:
- Ease of availability
- Rate of interest
- Resale in market
- Lock in period
- Both L&T and IIFCL bonds are easily available through most of the nationalized and private banks e.g. SBI, Axis, ICICI, HDFC, PNB etc and also through your mutual fund agent.
- IIFCL bonds score in rate of interest as the ROI offered on them is ranging between 8.15 to 8.3%, while on the L&T bonds the ROI is 7.75 to 7.5 %. But please do note that 8.3% option in IIFC is for 15 years while in L&T the longest tenure is 10 years.
- Both will be available for resale/purchase a minimum after 5 years but in IIFCL the resale of 15 year bonds will be only after 7 years, so you have a longer lock in period if you want higher rate of interest.
- Both have good rating from CARE but IIFCL has a slightly better rating considering it is government owned company.
So now the question comes which one you should go for?
It is fairly simple first decide you want to go for a government or a private company. If that is not an issue then look at rate of interest being offered. Here IIFCL scores, and also on the rating front IIFCL scores. But remember the higher rate of interest in IIFCL comes with a longer tenure also.
If I were you I would go for IIFCL for the 10 year option that will give 8.15% interest with same 10 year tenure as L & T. I would also prefer to get my interest payment annually rather than wait for 10 years for the same. (This effectively reduces the total interest you will receive).
Disclaimer: Please note that this blog is meant for general guidelines and is not an exhaustive comparison. Also it is not an advise to invest in one or another bond. Please check with a financial planner before investing.
Thanks for reading do leave a comment.