Idbi Flexibonds 3 Comes At The Right Time For Taxpayers To Avail

The other offerings can also be considered. An analysis

Flex your tax

IDBI Flexibonds 3

Issue opens on : January 23, 1998

Issue closes on : February 18, 1998

Issue size : Rs 750 crore

Greenshoe : Rs 750 crore

Deemed date

of allotment : March 16, 1998

Minimum

Investment : Rs 5,000, further in multiple of Rs 5,000

IDBI is accessing the capital markets with its third series of flexibond unsecured bonds. The first two series in 1996 and 1997 met with good success and for Flexibonds 3, the timing is perfect as this is the time when most tax-saving investments are made.

 

The issue has four variants of bonds which are the Infrastructure Bond 98, Deep Discount Bond 98, Growing Interest Bond 98 and Regular Income Bond 98. IDBI plans to mobilise Rs 750 crore and has a greenshoe option to retain a further Rs 750 crore.

The unique fact about this issue is that IDBI has appointed two market makers to provide exit options to investors. For lots of above Rs 1 million, it has appointed Securities Trading Corporation of India and for lots less than Rs 1 million, it has appointed IDBI Capital Services as market makers.

It has also designed another instrument, the Growing Interest Bond where the coupon rate will increase with the holding period. The Flexibonds issue is coming at a time when interest rates have flattened and further downward movement is not expected. With further debt issues expected to hit the market, the packaging of these bonds is good by providing investors with varied instruments to suit their needs. The tax benefits for the investors is important in the current scenario.

Infrastructure Bond 98

At the present moment, when taxpayers have to invest in tax-saving schemes, this bond is the best option in this issue. The investors are eligible for tax benefits under any of the following sections of Income Tax Act for the Infrastructure Bonds 98 of this issue.

The tax rebate under section 88 or Capital gains tax exemption under section 54EA or capital gains tax exemption under Section 54EB. To avail of all the tax benefits of this issue, investors can split their claims into any of the above mentioned three to maximise their tax savings.

The bond comes with a coupon of 12.5 per cent payable annually. The maturity of the Infrastructure Bonds is seven years from the date of allotment. The investors have the option to encash their bonds at par at the end of the third year and at the end of fifth year from the date of allotment.

In case the put option is exercised by investors, then the interest will be reduced to 12.25 per cent and the excess interest paid will be deducted from the amount outstanding. This low coupon is charged only if the put option is exercised at the end of the third year.

The rebate under Section 88 is available to individuals as a deduction of an amount equal to 20 per cent of the investment made in these bonds from the amount of income tax liability. The rebate under this section is clubbed with other investments like LIC premium, PF contribution, investments in mutual funds, National Savings Certificate, etc. The advantage here over the other schemes of section 88 is that the first call option is after three years and the individual can use that money three years later.

For professionals, the deduction is 25 per cent or more of the total income. The maximum limit of deduction is Rs 14,000 for individuals and for professionals, it is Rs 17,500. This rebate is available for investments in the Infrastructure Bonds of this issue provided that the bonds are not sold or transferred at any time within a period of three years from the date of investment.

Capital gains tax exemption under Section 54EA is available to investors if the net consideration from the sale or transfer of the long term capital asset is invested in this issue within a period of six months from the date of such sale or transfer. The exemption is available if the net amount of capital gain is invested fully in this issue.

If the net consideration from the sale of the long term capital asset is invested only partly in this issue, then the amount invested in the issue will be fully exempted from capital gains tax.

The investment in these bonds should be for a minimum period of three years, else the amount of capital gain not charged by way of investment in these bonds shall be charged under the head capital gains relating to long term capital assets of the previous year in which the bonds are transferred or sold. If loans are taken on these bonds then also capital gains will be charged under Section 45.

Capital gains tax exemption under Section 54EB is also available to investors if the capital gain (against net consideration under section 54EA) arising from the sale of long term capital asset is invested fully or partly in these bonds.

If the amount of investment in these bonds is not less than the capital gain arising from the sale of long term capital asset, then the entire capital gain is exempt from capital gain tax under Section 45. If the amount invested is less than the capital gain, then the amount that is invested in these bonds is only exempt from capital gains tax.

Under this section, the capital gain tax exemption is available only if the investment in these bonds is for a minimum period of seven years. Under this section too, if the bonds are pledged then the capital gains tax exemption is not permitted.

Even if investment in Infrastructure Bonds is not made keeping in mind the tax benefits, then too the minimum holding period is three years.

Other possible tax benefit of the Infrastructure Bond is that a deduction under section 80L will also be applicable once the government approves the application of IDBI for the same purpose which will enable the investors to claim a deduction of Rs 12,000 clubbed together with the interest income and other specified income.

Growing Interest Bond 98

This bond is structured such that it will provide the investor an option to exit at the end of each year. The tenure is of 5 years with the interest rate increasing every year. The interest is paid annually at the end of the year. The minimum investment in the bond is Rs 5,000 and further investments in multiples of Rs 5,000.

In the first year, investors will receive an interest of 10.5 per cent, in the second year the interest increases to 11 per cent, in the third year it is 12.5 per cent, in fourth year it is 15.25 per cent and in the fifth year the applicable rate is 18 per cent. The yield to maturity of this bond is 13 per cent. Considering the unsecured nature of the bonds the yield of the bond is not too attractive.

Deep Discount Bond 98

This is issued at a discount to the face value of Rs 500,000. The amount to be invested per bond is Rs 12,750. The bond has a maturity of 30 years and the investors have the option of exiting from at the end of every five year period from the date of allotment.

The deemed face value on redemption of these bonds in the five year period are Rs 23,500 at the end of the fifth year, Rs 43,000 at the end of the tenth year, Rs 79,000 at the end of the fifteenth year, Rs 145,000 at the end of the twentieth year, 270,000 at the end of the twenty fifth year from the date of allotment. The deemed date of allotment for this bond is March 16, 1998.

IDBI also has the call option to redeem the deep discount bond as per the redemption schedule available to the investors. The yields for the various holding periods as per the redemption schedule works out to be 13 per cent for the first five years of holding period and for the next twenty year holding period the yield works out to 12.93 per cent and for the yield to maturity (thirty years) is 13 per cent.

Hence, the investors will be better off if they redeem their bonds in the first five years. In the case of investment in deep discount bonds, the difference between the redemption amount and the initial investment amount will be treated as interest income for individuals and hence the tax outgo in the year of redemption will be high.

Regular Income Bond 98

The fourth instrument in the current series of offering from IDBI is the regular income bond which comes with a coupon of 12.25 per cent per annum payable monthly or 13 per cent per annum payable yearly. The bond has a maturity period of five years. The minimum investment in this instrument is also Rs 5,000 and further in multiples of Rs 5,000.