Save tax, Invest in Infrastructure Bonds

In this year’s budget finance minister has not reduced only the tax rates but also given an additional exemption i.e. Deduction from Income for Investment in Infrastructure bond (Section 80CCF of the Income-tax Act).

Few years back there was a provision for deduction for investment in infrastructure bond, which was later on withdrawn. But now it has been reinstated again. Traditionally, Infrastructure bond has been issued in the month of January and February i.e. towards financial year-end. This year Infrastructure Finance Corporation of India (IFCI) has come out with its issue of infrastructure bonds now. The rate of Interest is fixed at 7.85 % for Buyback after the 5 year lock in period, with Cumulative and Non-cumulative option, and 7.95 % for Non-Buyback with Cumulative and Non-cumulative option. The investment allows benefit of deduction of income to the extent of Rs 20,000 in a year u/s 80CCF of the Income Tax Act. This is in addition to deduction of Rs 100,000 allowed u/s 80C.

The rate of interest as per government’s directive should not exceed the yield on government securities of 10-year maturities, prevailing at the end of the month that precedes such issue.

Points that need to be kept in mind before investing:

• Interest on these bonds are taxable
• Capital gains if any on sale of bonds after 5 years is taxable with no indexation benefit
• These bonds are unsecured, there by increasing the risk of loss
• The bond can be pledged or hypothecated for obtaining loans from banks after the lock-in period.

Other institutions like LIC, IDFC, and other Non-banking Finance Companies, which may be notified by the government, will also be authorized to issue infrastructure bonds the financial year 2010-11. LIC, which normally comes out with interesting policies each year, may also decide to raise funds. Since LIC is an insurer, we may not be surprised if LIC offer life cover along with the bonds.

The interest rate for issues that may come out later in the year may vary, and accordingly the total benefits arising on account of post tax yield.

We have been witnessing a rise in interest rates since the last policy meet of the RBI. Further the sensex and nifty have also been steadily rising. The RBI may, in order to remove excess liquidity, increase the base rates as seen in the past.