Thursday, July 15, 2010

Infrastructure Bonds

The latest budget has given one more option of investing upto Rs. 20,000 in infrastructue bonds and get tax benefit on that amount. This was there earlier as part of Section 80CCC but was included in the overall tax benefit of Rs. 1 Lakh under Section 80C. Now, this has been made additional to the Rs 1 Lakh under Section 80CCF.

It has been specified by the government that the yield of the bond shall not exceed the yield of government securities of corresponding residual maturity as reported by the Fixed Income Money Market and Derivatives Association of India as on the last working day of the month immediately preceding the month of the issue of the bond. The rate of return has been 5-6 % earlier and changes every year. The rate of return is less than the inflation so may not be beneficial to all the tax payers especially those in the lower tax bracket.

If you fall under the Rs 8 lakh taxable income slab or in the 5-8 lakh bracket, it makes sense to opt for the infrastructure bonds as a tax saving instrument.

If you come under the 1.6-5 lakh bracket it imay no be very beneficial for you to invest in this option just to avail the tax benefit.

It effectively means that for the taxpayer who is in the highest tax bracket of 30%, he will be able to save tax up to Rs 6,180, including applicable education cess, annually and in lowest tax bracket of 10%, he will be able to save tax up to Rs 2,060.

The central government has now notified that the bonds issued by Industrial Finance Corporation of India, the Life Insurance Corporation of India, Infrastructure Development Finance Company and a non-banking finance company classified as an infrastructure finance company by the Reserve Bank of India (RBI) would qualify as long-term infrastructure bonds.

The tenure of the bonds will be a minimum 10 years with a lock-in period of five years for an investor. After the lock-in period, the investor may exit either through the secondary market or through a buyback facility as specified by the issuer in the issue document. The bonds can also be pledged for obtaining loans from specified banks after the lock-in period.


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