The IDBI's Flexibonds issue opened on March 9, 2004 and will be available for subscription till March 29. The issue offers i) higher than the market returns ii) adequate safety iii) tax efficiency and most importantly iv) excellent flexibility and liquidity.

The issue caters to the different needs of investors by making available four different types of bonds with different options within a type.

An individual can select any one of the four types of bonds and any option within a Bond or have a mix of different types and options simultaneously as per his special needs.

The most important aspect is that IDBI Infrastructure (Tax Saving) Bond has an excellent tax-slashing device. This is the last opportunity for the current year.

The bonds come in four different flavours:

Infrastructure (Tax Saving Bond): These have four options as indicated in Table-1. Though the interest rate at 5.50 per cent p.a. payable annually for three years appears low, when one takes into account the benefit of tax rebate, the Break-Even Rate (equivalent fully taxable rate without any tax concessions), works out to 11.71 per cent which makes it an almost mandatory investment.

Floating Rate Bond: This is the first of its kind offering protection both to the investor as well as IDBI against volatility of interest rates in future. The interest would be paid semi-annually at 80 basis points over the 5-year G-Sec with five years maturity.

Retirement Bond: Here there are two options, catering to the different requirements of retired or retiring persons. The first one gives the normal quarterly interest after a wait period of two years and returns the capital at end of its tenure of seven years.

The second option is interesting. The investor will get on the minimum investment of Rs 30,000 quarterly payment of Rs 1,585 after a wait period of three years.

This will consist of interest along with certain return of capital so that at the end of its term of 10 years, the entire capital gets fully returned to the bondholder. Thus, the scheme gets converted into a pension for 10 years.

Regular Income Bond: These have the normal features. There are four options. The only point to be noted is that there is no call option (premature withdrawal by the investor) or put option (premature closure of the scheme by IDBI) for any of the bonds. There is a lone exception. The Option-D with a tenor of 15 years has a put option at the end of the 9th and 12th years.

Salient features

Since the details are available in IDBI's offer document, it is pointless to reproduce the flexibility given by the Flexibonds. The following are some of the noteworthy aspects:

1. Applications can be made by resident Indian individuals, minors through their guardians, HUFs, providend funds, superannuation funds, gratuity funds, public financial institutions, statutory corporations MFs, banks and insurance companies. Moreover, companies, body corporates, registered societies, and most importantly, trusts which are authorised to invest in the bonds are also welcome. However, NRIs are not eligible to invest.

2. Where the application is for Rs 50,000 or more, PAN/GIR is mandatory. Similarly, bank account details are necessary.

3. Tax benefits:

• There will be no TDS on any of the bonds. Though the offer document states, "Payment of interest will he subject to TDS as per prevailing tax laws", IDBI had applied for exemption from TDS u/s 193(iib) and has received positive reply from MoF vide their letter F. No. 275/105/2003-IT(B) dt 20.2.04 indicating that the necessary notification will be issued later on.
• The Tax Saving Bonds are covered u/s 80L wherein the interest income from the bonds aggregated with income from other sources under the umbrella of the section is deductible under the general category up to Rs 12,000.
• The TSBs are also eligible for rebate u/s 88(2xvi) with an aggregate ceiling of Rs 1 lakh out of which Rs 70,000 can be occupied by some other specified avenues such as insurance premiums, PPF contributions, NSC investments, etc. Yes, if someone so desires, he may contribute the entire Rs 100,000 to TSBs instead of Rs 70,000 to PPF (or other eligible avenues) and Rs 30,000 to TSBs. Evidently, it is better to contribute as much as possible to PPF in view of its interest being 8 per cent p.a., tax-free whereas 5.50 per cent p.a., with tax shelter of only Sec. 80L. Nonetheless, some of the investors might prefer TSBs because I) its tenor is only 3 years and ii) the interest is available annually (Option-A).
• All the other types of bonds are fully taxable.
• Provisions of capital gains, long-term or short-term will be attracted on cumulative bonds sold or transferred by the account holder. The bonds will be listed on the BSE and NSE.

As an investor-friendly measure, IDBI has provided for holding these bonds in the demat mode. ECS facility for receipt of interest is also available.

To sum

The superb flexibility that is being infused into a rigid fixed income instrument vindicates my faith and confidence in IDBI.

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