Infrastructure Bonds Investment To Aid Income Tax Saving!

In the Income Tax Act, Section 80CCF has been introduced for the FY 2010-11, wherein investments in infrastructure bonds to the extent of Rs. 20,000 will be eligible for tax deduction. This is in addition to the permissible deduction of Rs. 1 lakh from annual income under sections 80C, 80CCC and 80CCD of the Income Tax Act. This move by the government is an effort in the direction to promote investments in the infrastructure projects in the country.

What does it imply?

Investments/subscriptions to long term infrastructure bonds, to the tune of Rs. 20,000 during the current financial year, i.e. 2010-11 and assessment year 2011-12, will be allowed as a deduction from annual income to arrive at taxable income for individuals. This will result in additional tax saving.

E.g. If one falls in the highest income bracket i.e. 30%, this new tax saving avenue will result in savings of Rs. 6.000 without taking into consideration cess.

Thus your tax deduction limit on account of the introduction of the new section increases Rs. 1.2 lakh. It is essential to note that, the additional Rs. 20,000 can be invested only in certified infrastructure bonds by the government.

Product Features

• Tax saving infrastructure bonds would have tenure of 10 years with a lock in period of 5 years
• It will be mandatory for the subscriber to furnish a permanent account number (PAN) to the issuer for investment in the bonds.
• Investments should be only in the long term infrastructure bonds specified by the government
• Investors wanting to exit after the 5 year lock in period, can do so either through the secondary market or through a buy back option as specified by the issuer
• After the lock in period, these bonds could be pledged for loans from specified banks
• There is no limit on investment in these bonds but the amount eligible for tax deduction is restricted to a maximum of Rs. 20,000.
• The rate of interest and other terms and conditions will be specified by the issuer subject to the yield not being more than the yield on Government securities of similar duration.
• The end use shall be for infrastructure lending as per Reserve Bank's Guidelines.

Infrastructure Bonds that would qualify for tax exemption

• Industrial Finance Corporation of India
• Life Insurance Corporation of India
• Infrastructure Development Finance Company and
• Non-banking finance companies classified as infrastructure finance firms by the Reserve Bank of India

How do you buy these bonds?

These bonds are yet to be launched and given that tax planning is something that most tend to focus towards the end of the financial year, expect them to be launched towards the latter half of the financial year.

There will be a public offering for these bonds wherein investors will have to fill the application form to subscribe to the bonds. There will be guidelines in terms of minimum investment etc. These are then likely to be listed and traded on the stock exchange. It will be very similar to that of the NCDs launched by L&T Finance and Tata Motors.

Things you need to know

• The tax incentive provided by the government in no way indicates that the investment is such bonds has sovereign guarantee. Thus investment in bonds issued by NBFCs should be done only after assessing the risk profile in terms of repayment capability of these institutions.
• The lock in period is 5 years and the tenure of the bond is 10 years. Only if you have the financial wherewithal to block money for such tenure, should you consider investing in these bonds
• These bonds can be pledged for loans. However, the amount of the loan will be dependent on the market value of the bond and the credit quality of the instrument.

The rate of interest on infrastructure bonds, are unlikely to be attractive and given that inflation is in double digits at this point, the real return will be negative even if you consider the benefit from the tax saving. So the moot question is, should you invest in these bonds?

If you are looking for a low risk investment and do not know of any better investment opportunity, it may be worthwhile to invest in these bonds and save tax.  However, it may not be feasible to invest in this instrument just to save taxes if you have loans to pay off. It makes sense to use the money to pay off the loans as the rate of interest on the loan will be much higher than what you will fetch by investing in infrastructure bonds.