Bond is a debt security, in which the authorized issuer owes the holders a debt and, depending on the terms of the bond, is obliged to pay interest to use and/or to repay the principal at a later date, termed maturity. A bond is a formal contract to repay borrowed money with interest at fixed intervals which may be semi annual, annual, sometimes monthly.
Using the same bond structure when any government and organization borrow money for any expansion or project, it is known as infrastructure bond.
What It Is
Infrastructures bonds are borrowing that are invested in Government funded infrastructure project within a country. These bonds are issued by government of or can be issued government authorised Infrastructure organizations or non banking financial organization.
Functioning of Infrastructure Bond
Any Indian occupant who is 18 and above or a Hindu unified family or can invest in infrastructure bond. Infrastructure bonds are useful for individuals who require a fixed income. They offer a better than average rate of interest and tax reductions. The development of these bonds is frequently between 10 to 15 years with an alternative to buy back after a secure of 5 years. These bonds are listed either on or both National Stock Exchange or Bombay Stock Exchange that gives you a choice to exit after the secure period. A Lock-in period is the point at which you can’t sell a specific instrument.
Tax benefit on Investing in Infrastructure Bond
Total investments of up to Rs. 20000 are eligible for income tax deduction under Section 80 CCF of the Income Tax Act
This is over and above the Rs. 1 Lakh deduction available under Section 80 C.
But interest income on the Bonds is applicable. But no tax is deducted at source if the annual interest is less than Rs. 5000.
Advantages of Investing in Infrastructure bond
Investments made in Infrastructure Bonds are easy to handle. Monitoring your investment is also highly simple in Infrastructure bond because of the Demat Form attached to it.
Since Infrastructure bond are listed on stock exchange, it increases the liquidity of the investment.
Since the Infrastructure bonds are issued by government or government authorised company, they have a very high credit rating, as a result the risk involved in your investment is highly low.
It is possible for an investor to verify and assess the quality of instruments they are investing in. This can easily be done by rating issued by agencies like ICRA, FITCH CARE and CRISIL.
Overview Highlights of Infrastructure Bond
- Capital protection – Capital in Infrastructure bonds are well protected
- Reaction in Inflation – The infrastructure bond is not inflation protected, which means whenever inflation is above the interest rate offered on the bond; the return from the scheme earns no real returns. However, when the inflation rate is below the rate offered by the bond, it does manage a positive real rate of return.
- Guarantee – The interest rate on the bond is guaranteed and varies across bond issuers and the tenure of the bond opted for.
- Risk – Fixed income instruments always carry interest rate risk. Increase in market interest rates will have a negative impact on the price of the bonds. However, the buyback option provided by the issuer allows the investor to redeem the bonds at face value irrespective of the market price at which they are traded.
Infrastructure financing has inherent project specific and general risks besides being exposed to regulatory changes, liquidity risks, risks of NPAs or non performing assets, risk of volatility in interest rates and economic policy risks.