Should one invest in infra bonds?

Thu, 16 Feb Pre-Open

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India represents a lot of opportunity. However, until it gets its infrastructure in order, that potential will be muted. In order to hasten the process of infrastructure building, the Planning Commission of India has set an ambitious target of spending US$ 1 trillion in the 12th five year plan. To fund this initiative, the government is trying to tap various sources at its disposal. Infrastructure bond is just one source where the government has given tax breaks for up to Rs 20,000 for individuals. Beyond that, there are several other debt options that provide better returns. Some of them include debt oriented mutual funds, bank fixed deposit, corporate fixed deposit and fixed maturity plan.

Debt oriented mutual funds allocate major part of the fund in government securities, corporate bonds and debentures, and sometimes in fixed deposit. However a small part (up to 30%) goes towards equity. Hence, investors tend to see fluctuation in returns. Bank fixed deposits also provide good rate of return. Corporate fixed deposits are offered by blue chip companies. These are highly rated debt instruments. Companies like Mahindra Finance and Tata Motors offer such deposits. Fixed maturity plan are mutual funds which offer an expected return of 9% to 10%.

As compared to the above mentioned debt instruments, infrastructure bonds offer more advantages. Long term infrastructure bonds are declared to be tax saving instruments under section 80CCF. The beauty of this tax saving instrument is that it is not counted under the regular tax saving cap of Rs 1 lakh under section 80C. Once you have exhausted the limit of Rs 1 lakh for tax saving investments, you may further invest in infrastructure bonds to get tax benefits. The maximum limit for investments in infrastructure bonds is Rs 20,000 for getting tax benefits. While investing in the infrastructure bonds, the investor will either have to opt for the annual or the cumulative option. In the annual option, the investor receives the interest amount every year, whereas in the cumulative option, the interest amount gets reinvested and the investor can draw the full amount comprising of both the principal and interest at the end of the investment period.

Infrastructure bonds (long term) do help you save some money in the form of tax savings. However, before investing, you should consider the tax bracket you fall under, the inflation adjustment till maturity date and your risk appetite. So if you are a young person, falling under lower income tax slabs but having more appetite to risk considering the long time horizon, the infrastructure bonds may not be the best vehicle for your money. On the other hand, if you already have significant amount of investments in equity and looking to rebalance your portfolio with some extra tax benefits, then you may consider investing in infrastructure bonds.