Tag Archives: bonds

Infrastructure Bonds

What are Infrastructure Bonds?

The government of India awards infrastructure status to certain projects that are of national importance. Infrastructure projects are usually undertaken by PSU entities such as IDFC, PFC, etc. with L & T being the exception. Capital for these projects is raised through infra bonds. The minimum investment ticket is Rs. 5,000 and there is no upper limit.What are their features?

Security:
Like all bonds, these bonds have credit ratings. As the government vets these bonds, they typically have the highest credit rating. The issues may or may not be secured (i.e. backed by assets).

Taxation:
Investments in infrastructure bonds can be used to claim deductions under Section 80 C. The interest earned on the bonds is taxable.

Tenor:
Infra bonds are long-term bonds where the tenor is 10 to 15 years. The bonds are callable after the lock-in period. This means that the issuer can recall or buy back the bonds once the lock-in period is over.

Liquidity:
Infra bonds are locked in for five or seven years depending on the tenor (ten or fifteen years). However, they are exchange-traded and can be sold after the lock-in period. It might still prove difficult to liquidate the bonds as there is low market participation.

Who are they meant for?
Infra bonds are meant for investors looking to park their money in a secure avenue. Currently, there are no new issues. Returns are close to those of government securities with similar maturities. Since there are other instruments offering higher return under Section 80 C, it may not make sense to invest in infrastructure bonds solely for the tax benefit.

RBI 8% Savings (Taxable) Bonds

The Premise

The RBI first issued 8% bonds in 2003.

As the name suggests, they pay 8% interest per annum and the interest income is taxable. Investors need to invest a minimum of Rs. 1,000 there is no ceiling or limit on the investment amount. Normally, the bonds have a maturity of six years. For senior citizens, the tenor may be lower. Interest is either paid semi-annually or cumulatively at the time of maturity. These bonds are transferable but are not traded on the secondary market. Essentially, the bonds accrue interest and there is no capital appreciation. Since they are issued by the government of India, the credit quality is highest.

 

Investment Strategy Investors with no tax liability (Charitable Institutions, etc.) will benefit the most from these bonds.

It also makes sense for investors who are in/below the 20% tax slab.
For investors in the highest tax bracket, the 8% interest translates into a 5.6% return post taxes. It’s important to keep in mind that the returns earned are risk-free. In comparison, the 5-year post office term deposit rate is currently at 7.6% (5.32% post taxes). A medium-term debt mutual fund may deliver higher returns from both capital appreciation and indexation benefits.

54 EC Bonds

What are 54 EC Bonds?

54 EC Bonds are popularly known for the tax benefits they provide under Section 54 EC of the Income Tax Act. These bonds are typically issued by the Power Finance Corp (PFC), Rural Electrification Company (REC), and the National Highways Authority of India (NHAI).

They have a tenor of 3 years. Currently, they offer 5.25% P.A. These bonds are non-transferable and are not traded on any exchanges. Investors may invest a minimum of Rs. 10,000. There is an investment ceiling of Rs. 50 Lakhs. The investments are considered safe, as they are AAA rated. The most attractive feature is that capital gains arising from transfer of capital assets are exempt if invested in 54 EC Bonds.

 

Taxation of 54 EC Bonds
Benefits are available if the capital gains are invested within six months of being realized. The bonds must be held until maturity (i.e. locked in for a period of three years).The interest earned on the bonds is taxed per the income slab.

The table here illustrates the benefits for capital gains of Rs. 50 Lakhs for  the 20% & 30% tax slabs.

 

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Tax-Free Bonds

What are tax-free bonds?

Government-backed entities such as, NHAI, REC, PFC, etc. issue tax-free bonds to raise capital. The capital is meant for long-term projects and these bonds have tenors of 10, 15 or 20 years. The interest earned from these bonds is exempt from taxation. Capital gains from the sale of bonds are taxable.

STCG – Short- Term Capital Gains (< 12 months); LTCG – Long- Term Capital Gains (>12 months)

 

Features of Tax Free Bonds

Since they are issued by government backed entities, there is a very low probability of default. Consequently, these bonds have high credit ratings. The returns are linked to government securities with similar maturities. Since the interest earned is tax free, the post-tax returns when compared to similar bonds turns out to be more efficient. The bonds are traded on the exchange, this gives investors the option to exit before maturity. The interest payment occurs on an annual basis. There is no investment limit, but retail investors may earn more interest.

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