Infrastructure bonds are gaining popularity because of the recently introduced tax benefit under 80CCF. Under this Section of the Income Tax Act, an investor can seek tax relief on the investment amount up to 20,000 in long-term infrastructure bonds.

After a spate of infrastructure bond issuances such as IDFC, IFCI, REC & PFC; L&T Infrastructure Finance has launched a long-term infrastructure bond issue. The coupon rates of the earlier bonds issuances were in the range of 9-9.16% per annum. L&T Infrastructure Finance is offering 8.70% on its bonds.

These Tranche 2 Bonds will carry a minimum lock-in period of five years from the date of allotment. They can also be redeemed after 10 years from the effective date of allotment.

Investors with a demat account can purchase the bonds in dematerialised form and trade after the minimum lock-in period, which is 5 years. There are three exit options available for investors in these bonds.

The first one is at end of 5 years, the second at the end of 7 years and the third after 10 years which is at the time of redemption. Investors who don't have a demat account can opt for the bonds in physical form.

There are two variants in these tax saver bonds. Under the first variant, interest rate is 8.70% payable annually and in the case of Series 1 2, the interest rate is 8.70% compounded annually payable at the end of maturity or buyback. The maturity is 10 years from the deemed date of allotment.

The Tranche 2 Bonds have been rated 'CARE AA+' by CARE and '[ICRA] AA+' by ICRA.

Should you invest?

It definitely makes sense to invest in these bonds, if you have not yet invested in infrastructure bonds. These bonds are priced lower than the earlier bond issuances reflecting a possibility of rate cut in the near future.

If there is no liquidity pressure, you should opt for the cumulative option for a maximum period of 10 years, under which the interest rate is compounded annually.

Under the payout option, there is an element of reinvestment risk as the interest rate may not be as high as 8.70% going forward.

In the process you will also save taxes. (Economic Times)