Infrastructure Bonds

Infrastructure Bonds – Know All About It

Infrastructure Bonds – Know All About It

A bond is a financial product that allows you to borrow money.

Governments and businesses both require funding for projects and expansion. Infrastructure bonds are debt instruments that are used to support government-sponsored infrastructure projects in a given country. Governments or government-approved infrastructure companies or non-banking financial companies issue them.

Infrastructure bonds are suitable for those that require a steady income. They provide a reasonable interest rate as well as tax advantages. These bonds typically have a 10- to 15-year maturity and a 5-year lock-in period before they may be bought back.

These bonds are listed on either the National Stock Exchange or the Bombay Stock Exchange, and you can exit them after the lock-in term is through. A lock-in period is a period during which you are unable to sell a specific instrument.

Governments, infrastructure financing corporations, and other entities typically issue infrastructure bonds to raise funding for a country’s infrastructure development. The government is in charge of the vast majority of infrastructure development initiatives.

 However, due to a lack of money, many feasible infrastructure projects have been abandoned. To raise cash for such initiatives, the government sells bonds.

Tax Benefits: The bonds provide tax benefits, allowing projects to be funded at cheaper interest rates. Over and above the Rs 1 00,000 exemptions, an investor can avoid taxes on investments up to Rs 20, 000 under section 80CCF.

These bonds have two interest payment options: I annual interest payment and (ii) cumulative interest payment.

Investors who chose annual interest would have paid taxes on the interest income produced on these bonds each year. Investors who choose the cumulative option, on the other hand, would almost certainly have to pay more tax on the interest than they saved in the investment year under Section 80CCF.

Benefits of Infrastructure Bonds

  • Because of the Demat Form, it is simple to manage and track your investments.
  • You can boost your liquidity by listing on stock exchanges.
  • Because the issuing corporations have good credit ratings, there is no risk associated.
  • The ratings produced by institutions such as CARE, FITCH, CRISIL, and ICRA can be used to determine the quality of instruments.

How to apply?

  • If you have a Demat account, you can apply to invest in an infrastructure bond online. You must complete an online application form.
  • To trade infrastructure bonds, you’ll need a Demat account and a PAN.
  • These relationships can be applied in a physical form. You’ll need a PAN card that has been self-attested. As part of the KYC (Know Your Customer) procedure, you must provide proof of identity and address.
  • These bonds have a ten-year maturity and a five-year lock-in period.
  • After the lock-in period has expired, these bonds can be exchanged on stock exchanges like stocks.
  • An infrastructure bond’s interest is taxable.

You can invest in infrastructure bonds if you are an Indian resident (not a minor) or a HUF (Hindu Undivided Family). NRIs are unable to invest in these bonds. These bonds require a minimum investment of INR 5000, with subsequent investments in multiples of INR 5000.

Infrastructure Bonds India has a few noteworthy features.

Other products, such as mutual funds, are market-linked and not guaranteed, so returns may not be reproduced in the future.

In the case of Infrastructure Bonds India, a three-year lock-in period provides a reasonable return, and they are capable of delivering in the future.

When compared to Infrastructure Bonds India, the risks of investing in mutual funds are substantially larger.

Market-linked products may be unappealing to investors who are accustomed to risk-free investments.

Investments should be guided by the risk appetite of the investor rather than the scale of returns.

Advantages 

• Bonds are safe because they are backed by assurances from the state and municipalities on the land where development is taking place, bank guarantees, and sureties, and pledges of rights under project agreements, among other things;

• Recoverability: the issuer’s income from the operation of the relevant infrastructure facility is used to assure payments to bondholders.

• For the issuer, the ability to raise cash over a lengthy period at a cheap borrowing cost when compared to credit resources;

• Throughout the securities’ circulation period, the predictability of future earnings and the form of collateral contribute to the assignment of a high grade;

• They are not adversely influenced by unpredictable variations.

Disadvantage 

Risks linked with the implementation of infrastructure projects are disadvantages (environmental, market-determined risks, risks associated with government regulation measures, etc.)

• Inadequate data on the infrastructure bond market: “interconnection” of funding occurs when bond issuers and buyers agree on terms in advance, causing the investor’s “premium” to diverge from the market premium; challenges in accounting for infrastructure projects. • A scarcity of projects for this form of financing, because traditionally, the project model involves lending as a source of funding; • A shortage of projects for this sort of financing, because traditionally, the project model includes lending as a source of funding;

It’s like hitting two birds with one stone when it comes to infrastructure bonds. To begin with, infrastructure projects can raise financing for infrastructure at a significantly cheaper cost. At the same time, this provides High net worth investors with tax-free income regularly. Even for the taxpayer, this is a new way to save money on tax payments!