November 13, 2011

Infrastructure Bonds issued by Indian Railway Finance Corporation (IRFC)

Infrastructure Bonds issued by Indian Railway Finance Corporation (IRFC). The interest income earned on such bonds is tax free (u/s 10 clause 15 of Income Tax Act). The bonds are issued by a Government Owned Undertaking and therefore carry a very high credit rating. The issue has been rated ‘AAA/Stable by CRISIL’, ‘LAAA by ICRA’ and ‘AAA by CARE’.  The issue has two options – Option I (10 years) & Option II (15 years) – with coupon rates of 7.55% and 7.77% p.a. respectively. As the interest income is tax free, the pre-tax yield works out to an impressive 10.93% and 11.24% for Option I & Option II (for individuals in the highest tax bracket).

 

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October 15, 2011

Infrastructure Bonds in India

Infrastructure Bonds in India came into lime light in February 2010 when finance minister Pranab Mukherji proposed the inclusion of long term infrastructure bond in tax saving elements upto the limit of Rs 20000. India business news was filled with this news, it was a big indian economy news. Indian growth story depends upon infrastructure. This came as a positive surprise for Indian Investment community especially for those who were looking for higher and more tax saving limit and options.

Infrastructure bonds in India can be used by the investors to save upto Rs 20000 and under Section 88 of the Income Tax Act, 1961. Infrastructure bonds are issued by non banking institutions like Infrastructure Development finance corporation. These are long term bonds where money is invested in government’s infrastructure projects.

Infrastructure bonds in India are offered with a lock in period usually five to seven years. Return on infrastructure bond will not exceed the yield on 10 year government securities. There are two options available and they are cumulative and annual. One factor which plays a pivotal role in infrastructure bond in India is interest rate and inflation. If interest rate rises then prices of these will fall.

Rs 20000 invested in infrastructure will attract tax deduction but the interest earned on it is taxable. There is one additional factor which should be accounted before investing in Infrastructure bonds in India and that is they do not offer any protection against rising inflation as their rates are prefixed. These investments in infrastructure bonds are considered safe but they do not guarantee that you will be your invested principal back.

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