Long Term Infrastructure Bonds - Boon to tax payers!

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With the growth seen in Infrastructure, people want to invest in this sector. Along with infrastructure company shares, you can also invest long term infrastructure bonds which offer tax benefits. These bonds were introduced so that an average Indian can take part in the economic growth and also save up on some tax. These bonds can be invested in by Resident individuals & Hindu Undivided Family (HUF).

 



Tax saving infrastructure bonds u/s 80 CCF

 

Investment in infrastructure bonds provides an additional deduction over and above what is available u/s 80C of Income Tax Act 1961. These bonds offer a tax benefit with a maximum exemption of Rs. 20,000, thus it is an addition to Rs. 1,00,000 exemption u/s 80C.  Therefore your taxable income will be deducted by the amount you invest in infrastructure bonds subject to an upper limit of Rs. 20,000. Infrastructure bonds issued by either public sector or private sector companies would qualify under this section, however these would be notified by the government from time to time.



Tenure of the bonds


The money invested in these bonds is for infrastructure projects- building of roads, airports, power plants etc., thus the bonds are expected to have long duration. This duration can be 10 years or more. The minimum lock-in period is 5 years. After the lock-in period is over the investor can exit either through buy-back facility or secondary market as mentioned in the issue document at the time of issue. Investor can also take a loan against these bonds after the lock-in period is completed.



Coupon Rate


An average return offered by these bonds range from 7-8% approx. Conversely bonds issued by a private company can be a little higher ranging 8-9% approx.  These coupon rates also depend on the duration of the bond the longer the period the higher is the rate and also from company to company.

 

 

Taxable interest income


Though the investments made in these bonds are deducted u/s 80 CCF, the interest income received is taxable. The interest received is treated as income from other sources and shall be part of the total income of the financial year in which it is received by the assessee. No TDS shall be deducted on interest if the bonds are issued in Demat mode. However TDS will be applicable if the bonds are issued to investors in physical form.



Thus these bonds should be considered by most, so that they can avail an additional deduction above Rs 1,00,000. The higher income slab you fall in, the more benefit you get from these bonds. These bonds are rated by credit rating agencies such as CRISIL and ICRA so one can decide which company to invest in depending upon the ratings. However these bonds are advisable if the tax payer has completely exhausted Rs.1 lac investment u/s 80C.

 

With the Tax planning season on, these bonds do appear good if you fall in higher income brackets & have fully used Section 80C investments. Do keep in mind that though these are fixed income instruments, they are long term in nature & thus may not be the best instrument for long term goals. Keeping above points in mind you may invest in these bonds.

 

By Namrata Shah.

The writer is working with FpGuru.com as a Financial planner.


Comments  

 
0 #3 Jai 2012-03-09 15:24
Quoting Shail:
How do you identify or differentiate between two infrastructure bonds. What i mean to say is that since we had these huge infrastructure scams how do you decide the risk potential of each of these bonds?


Dear Shail,

One way to choose such bonds are on the basis of Credit Ratings. Higher the credit rating, safer the instrument.

Hope that helps!

regards,
Jai
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0 #2 Shail 2012-03-06 08:05
How do you identify or differentiate between two infrastructure bonds. What i mean to say is that since we had these huge infrastructure scams how do you decide the risk potential of each of these bonds?
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+1 #1 Varun Jain 2012-02-27 11:10
Perfect timing to write about such kind of products!!
Thank you and appreciate your work!!

will keep in mind and invest soon
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