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There is a surfeit of infrastructure bonds in the tax season. Infra bonds qualify for tax under 80CCF, and investments of up to Rs20,000 in infra bonds qualify for tax breaks in the year of investment. Interest paid on infra bonds is taxable. The bond is not transferable for five years. That is, there is an effective lock-in period of five years on the investment.

Infra bond investment of Rs20,000 has a tax benefit over and above Rs1 lakh deductions available under section 80C. Enough has been said already in the media about infra bonds. This column, therefore, questions whether the investment is worth its salt.

The price investors pay for tax benefits on investment of Rs20,000 is two-fold: one, lack of differentiation of credit quality; and two, interest rates on the bonds. The interest rates on infra bonds currently on sale range between 8.95% and 9.15%, irrespective of credit quality. In the infra bonds space, REC, PFC, SREI Finance, L&T Infra, IDFC and IFCI are all equally safe, irrespective of the ratings of taxable bonds of these issuers.

Going by taxable bond ratings, REC, PFC and IDFC carry the highest AAA rating, while others are lower down the rating scale. Investors should not associate tax-free status with lack of credit risk.

Coupon rates are also lower than those on taxable bonds of the issuers. Five-year bonds (assuming all investors go in for a five-year buyback option) of REC are trading around 9.35% while five-year infra bonds carry a coupon of 8.95%.

Investors receive a tax benefit on investment of up to Rs20,000 in infra bonds. But they don’t get any additional benefit if they invest more than Rs20,000 in a year in infra bonds. In other words, the maximum exemption figure (by way of investment in infra bonds) an investor can claim in computing taxable income is Rs20,000 per year. It isn’t possible to accumulate infra bonds as there’s no tax benefit over and above Rs20,000.

Should people invest in infra bonds? Investors eager to save tax on Rs20,000 of investments can invest. If investors find the savings too small to even consider investing, they should not invest, as the bonds are not attractively priced, given the ratings.

Investors looking to take advantage of interest rates on the bonds, on hopes that they could sell them for capital gains when rates fall, are better off looking at long-term interest rate products offered by mutual funds. Infra bonds are only for tax saving and nothing else.

The writer is the editor of www.investorsareidiots.com, a website for investors