Infra Bonds: PFC, IIFCL, IDFC, L&T Infra

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It is that time of year when a large number of salaried people rush in to invest some extra amount in tax-saving instruments to save some money going out as income tax to the government. For the financial year 2010-11, an individual can invest an extra Rs 20,000, into infrastructure bonds, which could help him/her save about Rs 6,180 as taxes. And since this is the last month for such investments, infra bond offerings from four companies are in the market, chasing taxpayers money. 
From the point of view of rate on interest being offered, Power Finance Corporation is paying the highest, at 8.30% annually for those who want some return every year. And if one prefers to go for the cumulative option, which is to receive a lump sum amount at the end of the 15-year maturity period, the yield works out to 8.50%. Speaking to TOI, R Nagarajan, ED (finance), PFC, said that the bonds also offer buyback options, after seven years for bonds of 15-year maturity and after five years on bonds of 10-year maturity. “We plan to raise Rs 5,300 crore though this offering,” Nagrajan said. PFC offer closes on March 22. 
Compared to PFC, one would receive 8.25% if one invests in the infra bond offering by Infrastructure Development Finance Corp, which closes on March 16, and 8.20% in L&T Infra’s offer and 8.15% in bond offer from India Infrastructure Finance Co (IIFCL). While the L&T Infra offering will close on March 7, the IIFCL issue is closing on Thursday. 
The main reason for higher return in PFC’s offering than others is that when the PFC offer opened the yields on government securities (G-Secs) of comparable maturities had already shot up. And government rules for infra bonds do not allow rate of interest on these bonds to be higher than the yields on G-Secs of comparable maturities. So if an issue is opened at a time when G-Sec yields are higher, the chances are investors will be offered a higher rate. 
As one analyst pointed out, investors will stand to gain a little more if they invest in the 15-year bonds than in 10-year bonds, something which is seen in all the four offers. While an investor can invest any amount in these bonds, but investments only up to Rs 20,000 will be considered while calculating the tax burden for that individual. Also while investments up to Rs 20,000 are tax-free, interest accrued from these investments are taxable in the hands of the investor. 
Considering the Rs 6,180 that one can save by investing in these bonds, the actual yield for an individual at the highest tax bracket, that is 30.90%, works out to be in double digits. For example, an investor putting Rs 20,000 in the 15-year cumulative option of the PFC offer, the yield will work out to about 12.63%, while a similar investment in IIFCL’s 15-year cumulative option will yield 10.85%, financial analysts said. 
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