Fixed Deposits Versus Infrastructure Bonds – Pros & Cons

 

Fixed Deposits Versus Infrastructure Bonds – Pros & Cons

There are some pros and cons of investing in Bank Fixed Deposits and Tax Saving infrastructure bonds. First of all let us discuss about the infrastructure bonds.

IFCI, IDFC and L&T have already launched their infrastructure bonds. The infrastructure bonds are tax deductible up to maximum Rs.20,000 under section 80CCF.

The interest offered by these bonds is 7.5-8 percent, varying marginally on account of buy-back and listing options. The interest rates offered by these bonds are linked to the 10-year government of India bond, and cannot exceed that. Presently, the 10-year government bond is close to eight percent .The bonds have a lock-in period. The interest is not subject to tax deducted at source (TDS). Investments up to Rs 20,000 helps in saving tax.

Bank Fixed deposits are for short time horizon while the infrastructure bonds are for the longer time horizon. Bank FDs are insured up to Rs.1 lakh by Deposit Insurance and Credit Guarantee Corporation of India's guarantee.

However, there will be TDS on Bank FDs and they are not tax deductible. On the other hand, most of the infrastructure bonds offer 2% higher returns than the Bank FDs.

So What should be the Investor’s Strategy?

In my opinion, investors should diversify their money between several Bank Fixed deposits and infrastructure bonds. The reason why I advise to diversify your bank FDs is to avoid TDS. Ideally you should build a well-rounded portfolio of Bank FDs and Infrastructure bonds.