Infrastructure Bonds - Tax Saving

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A successful society is characterised by a rising living standard for its population and increasing investment in basic infrastructure. There are financial instruments that let you be part of the infrastructure growth which is backed by the government.

 

Features
Eligibility
You need to be a Resident Indian to invest in this bond

Entry Age
No age limit is mentioned

Minimum Investment (Rs )
• Minimum: Rs 5,000
• Maximum: Rs 20,000 to avail tax deductions on investment
• Bond with face value of Rs 1,000 or Rs 5,000 issued depending on issuer

Interest
• 7.25 per cent to 8 per cent per annum depending on the issuer so far

Tenure
• 10 years

Account holding
• Individual
• Joint
• HUF

Nomination
• Facility is available

Infrastructure bonds are tax saving investments which offer tax exemption on investments up to `20,000 under Section 80CCF in a financial year. These bonds found prominence in Budget 2010 when they were introduced as an additional avenue to save taxes and have a limited window for subscription from time to time.

Investment Objective and Risks
The main objective of the infrastructure bond is to offer tax deductions on investments up to Rs 20,000. Investments up to a maximum of Rs 20,000 in these 10-year maturity bonds will be deductible from your taxable income under Section 80CCF. This is over and above the tax deduction of Rs 1 lakh that one can avail on savings and investments under Section 80C.

Capital Protection
The capital in the infrastructure bond is well protected.

Inflation Protection
The infrastructure bond is not inflation protected, which means whenever inflation is above the interest rate offered on the bond; the return from the scheme earns no real returns. However, when the inflation rate is below the rate offered by the bond, it does manage a positive real rate of return.

Guarantees
The interest rate on the bond is guaranteed and varies across bond issuers and the tenure of the bond opted for.

Liquidity
The infrastructure bond is completely illiquid during the first five years, unless the bond holder dies. After the lock-in of five years, liquidity is offered in the form of loan against the bond.

Credit Rating
The bond carries a credit rating which varies across bond issuers. So far the bond has managed a high credit rating.

• The facility of pledging the infrastructure bonds in the first five years to obtain loans is not permitted. After the five-year lock-in, the bonds may be pledged to avail loans.
• Investors in the bond are allowed to exit only through the secondary market after the compulsory lock-in of five years from the date of bond allotment.
• Investors can exit through the buyback route after 5 years depending on the option provided by the bond issuer.

Exit Option
Premature termination of the bond is not permitted.

Other Risks
Fixed income instruments always carry interest rate risk. Increase in market interest rates will have a negative impact on the price of the bonds. However, the buyback option provided by the issuer allows the investor to redeem the bonds at face value irrespective of the market price at which they are traded.

Infrastructure financing has inherent project specific and general risks besides being exposed to regulatory changes, liquidity risks, risks of NPAs (non performing assets), risk of volatility in interest rates and economic policy risks.

Tax Implications
Investments in the long term infrastructure bonds no more provide the tax exemption of `20,000 under section 80CCF. This sum used to be over and above the `1 lakh exemption available under section 80C.

Where to Buy the Bond
The bond can be bought from any of the bond issuers such as IFCI, IDFC, L&T and others whenever open for fresh subscription. The bonds are also sold through banks and brokers.

How to Buy
• You need to fill the form provided by the bond issuer.
• You will need your PAN number and demat account number.
• You can hold the bond in physical form if you do not have a demat account.
• Address and identity proof such as copy of the passport, PAN (permanent account number) card, driving license, voter's identity card or ration card.
• Carry original identity proof for verification at the time of buying if not already KYC compliant.
• A bond certificate bearing your name is issued if holding in physical form.

Points to Ponder
• The interest received from these bonds are taxable
• Interest income is treated as 'income from any other source' and will be added with the total income of the person and taxed as per the slab in that financial year
• No TDS shall be deducted on the interest received if the bonds are kept in demat form and shall be listed on NSE and BSE

There will be TDS for bonds if they are kept in physical form when annual interest payout exceeds Rs 2,500 per annum.

Tips and Strategies
There are several ways to arrive at the yield and hence savings when investing in these bonds. A simple way is to ignore all the complicated analysis of yields and returns. Invest only if your objective is to lower your income tax liability.

Going Online
The option to invest online exists during the investment period. Once the bond is five years old, it can be traded online as well though the demat account holding.

 

 

 

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