L&T is issuing tranche 2 of the long-term infrastructure bonds which will be open for subscription from February 7, 2011 to March 7, 2011. The issue comes in at a time when investors are on a look out for tax saving investment instruments before the fiscal year end in March. The coupon rates vary from 8.20 to 8.30%.

In the Union Budget 2010, the Government provided an additional income tax benefit of 20,000 under section 80CCF of the Income Tax Act, 1961 for investments made in long-term infrastructure bonds (as notified by the Central Government). This move was intended to provide a fillip to infrastructure finance and provide an opportunity to individual tax payers to reduce their tax liability.

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However, before we assess whether it is really worthwhile investing in these bonds, let’s understand the key highlights once again:

What are these bonds named as?

These bonds are specifically named as “Long-term Infrastructure Bond”.

Who would be the issuers of these bonds?

The bonds will be issued by the following entities: Industrial Finance Corporation of India Ltd. Life Insurance Corporation of India Infrastructure Development Finance Company Limited A Non-Banking Finance Company (NBFC) classified as an Infrastructure Finance Company by the Reserve Bank of India (RBI)

When will these bonds be issued?

These bonds will be issued in the financial year 2010-11 and the volume of issuance will be restricted to 25% of the incremental infrastructure investments made by the issuer during the financial year 2009-10.

What is the minimum tenure of these bonds?

These bonds will carry a minimum tenure of 10 years. Is there a lock-in period while investing? Yes, an investor is subject to a minimum lock-in period of 5 years while investing in these bonds. How does one exit after the lock-in period? After the lock-in period, the investor may exit either through the secondary market or through a buyback facility, as specified by the issuer in the offer document at the time of issue.

What will be the yield on the bond?

The yield on the bond will not exceed the yield on Government securities of corresponding residual maturity (10 year G-Sec for this bond), as reported by the Fixed Income Money Market and Derivatives Association of India (FIMMDA), as on the last working day of the month immediately preceding the month of the issue of the bond.

How would be the proceeds from these bonds used?

The proceeds from these bonds will be utilised for the purpose of infrastructure lending as defined by RBI (as per the guidelines issued by it).

Is interest earned on these bonds taxable?

The interest received in these bonds is not tax free. The investor is liable to pay tax on the interest received. The interest received on these bonds shall be treated as income from other sources and shall form part of the total income of the assessee in that financial year in which it is received. However no TDS shall be deducted on the interest received as these bonds if issued in Demat mode and listed stock exchange.