As the 10-year bond yield touches 8.7%, the debt market appears to be a good bet for long-term investors as it offers multiple options. While one can lock in funds in infrastructure bonds for 10 years, the recently notified 10-year National Savings Certificates of India Post are also a viable option for retail investors. Non-banking infrastructure finance companies are launching tax-saving infrastructure bonds, which give tax incentives. Under Section 80CCF, any individual can invest up to R20,000 in infrastructure bonds issued by certain institutions as notified by the RBI to avail tax benefit. It will be over and above the R1 lakh deduction allowed under Sections 80C, 80CCC and 80CCD.

Infrastructure bonds

The bonds of L&T Infra and IDFC Infrastructure are currently open for subscription at 9% interest. The term of maturity is 10 years with a buyback after five years, and one can opt for an annual or a cumulative interest payout.

While IDFC Infrastructure Bonds issue closes on December 16, the bond issue for L&T Infra closes on December 24. Infrastructure bonds give the investor the stability of fixed returns and safety of capital. An individual in the highest tax bracket of 30.90% can save an extra R6,000 by investing R20,000 in infrastructure bonds and those in the lowest tax slab of 10.30% can save R2,000 by investing the same amount.

All the bonds will be listed on the Bombay Stock Exchange and the National Stock Exchange and can be traded after the five-year lock-in period. Moreover, investors can mortgage or pledge these bonds to avail loans after the mandatory lock-in period. The issuer of the bond will not deduct any TDS and it is the responsibility of the investor to declare the income from these bonds and pay taxes on the interest income.

The income received in the form of interest would be taxable and, unlike a term deposit where one can withdraw the money with some or no penalty, an investors cannot withdraw the money for the first five years. One can exit after five

years as the companies are offering the option of buybacks.

The face value of L&T Infra bond is R1,000 and has been rated as CARE AA+ by CARE Ratings and ICRA AA+ by Icra. Payments can be made through the National Electronic Clearing System, cheques or demand draft and direct credit. The buyback option is available to investors on the first working day after the expiry of five years from the deemed date of allotment or on the first working day after the expiry of seven years from the deemed date of allotment.

Similarly, the face value of IDFC Bonds is R5,000 and has been rated as CARE AAA by CARE Ratings and Fitch AAA by Fitch. The bond will be issued in either demat or physical format and the National Securities Depository and Central Depository Services will be the depositories. The buyback is after five years from the deemed date of allotment and the maturity is after 10 years from the date of allotment of the bonds. Payments can be made through the National Electronic Clearing System, cheques and demand draft. The interest accrued on these bonds is not tax-free. In the annual interest option, the interest will be taxed every year and, under the cumulative option, one has to pay tax on the capital gains. However, the face value of the bond will not be taxed.

10-year NSC

From December 1, one can invest in a 10-year National Savings Certificates (IX ?Issue) issued by India Post, which are in denominations of R100, R500, R1,000, R5,000 and R10,000. The certificates can be held in as single and joint and a tax-payer will get deduction of the amount invested under Section 80C of the Income-Tax Act, 1961.

However, non-resident Indians are not eligible to purchase NSC. Payment can be made to a post office, either in cash, or a locally executed cheque, pay order or demand draft drawn in favour of of the post master.

The investments in NSC will earn interest at the rate of 8.7%, compounded semi-annually, and there is no upper limit for investment in the certificate. Till November 30, this year, the maturity period of NSC is six years, which has been reduced to five from December 1 and interest rate has increased from 8% to 8.4%. The decision to lower

the maturity period of NSC has been taken on the basis of the recommendations of the Committee for Comprehensive Review of the National Small Savings Fund (NSSF), headed by Shyamala Gopinath, the then deputy governor of the Reserve Bank of India.

One can opt for a either a five-year NSC or a 10-year NSC. So, for a certificate of R100, an investor will get R234.35, which is inclusive of the interest and the principal amount invested (see graphic). One can go for premature encashment in case

of the death of the certificate holder. If a certificate is encashed within a period of one year from the date of issue, only the face value of the certificate will payable.

If it is encashed after one year and before three years, only simple interest (currently 4%) will be paid. However, the interest rate will be calculated on the face value at the rate applicable from time to time to post office savings account. After maturity, in case of a certificate purchased on behalf of a minor who has since attained majority, it will have to be signed by such person, but the signature will have to be attested by the person who has purchased it on his behalf or any other person known to the postmaster. Analysts say that for a long-term investor, the 10-year NSC is beneficial to lock-in as interest rates have peaked and are likely to fall. ?It will be a good investment for long-term needs like child’s education or marriage and one can even pledge the certificates to avail loan,? says Vipin Kumar, a certified financial planner.

Moreover, NSCs come with a sovereign guarantee and there is no chance of a default, unlike a bank deposit where each depositor in a bank is insured up to a maximum of R1 lakh for both the principal and the interest amount held by him as on the date of liquidation/cancellation of bank?s licence or the date on which the scheme of amalgamation/merger/reconstruction comes into force. For corporate deposits, however, there is no guarantee of either the principal or the interest in case the company goes bankrupt.