Two core bond issues in offing

Investors searching for infrastructure bonds to save on taxes during the current financial year can heave a sigh of relief. In the new year at least two bond issues are lined up.

Rural Electrification Corporation (REC) is coming out with the private placement of Rs 895 crore bond issue on January 3. The bonds are for tenures of three and five years offering interest rates of 6 per cent and 6.25 per cent, respectively.

IDBI has also received approval for its tax-saving infrastructure bonds. The Rs 3,000 crore issue which is expected in two tranches will open for subscription on January 14. The rate of interest has not yet been worked out.

This year, only Power Finance Corporation's (PFC) tax-saving infrastructure bonds are available in the market. PFC's Rs 250 crore issue opened on December 1 for private placement.

This is unlike previous years when offerings from ICICI Bank, IDBI and REC were available from August onwards.

The REC offering of Rs 895 crore on tap is also through private placement. According to an REC official, public issue involves more expenditure and clearance from RBI also took time. Clearances are needed from Sebi and RBI for the issues.

Another tax saving bond that investors are used to is from ICICI Bank. The banks need to apply every year for permission to issue tax-saving bonds. This year too, ICICI Bank has applied for permission to issue bonds but RBI's clearance is still awaited.

The tax saving infrastructure bonds become important as Rs 30,000 out of the Rs 1,00,000, eligible for rebate under section 88 of the Income-Tax Act, is specifically marked for investment in such instruments.

People can invest upto Rs 70,000 in various tax-saving instruments such as PPF, pension plans, post office savings, NSC and infrastructure bonds, but to get rebate for higher amounts the infrastructure bonds are needed.

People with income upto Rs 1,50,000 are eligible for 20 per cent tax rebate on their investment and those with higher income can get 15 per cent rebate.

It makes sense to use up the Rs 1,00,000 limit as the tax adjusted returns are phenomenal. If you invest Rs 30,000 in 6 per cent bond, you will save tax of Rs 4,500 this fiscal and earn interest of Rs 1,800 per annum.

That comes to 21 per cent return in the first year. Taken for full three years, the annual return comes to about 11.9 per cent.