Long term tax saving infrastructure bonds : New kid on tax saving block

If you feel that the Rs. 1 lakh income- tax deduction limit was a constraint on your tax- saving abilities, here’s another avenue — long-term taxsaving infrastructure bonds. Through these bonds you can claim tax deduction for investment of another Rs. 20,000 and save tax up to Rs. 6,180 at the highest tax bracket.

As the current fiscal enters its last quarter and the investment deadline for saving tax (March 31) looms, many infrastructure firms have lined up the launches of their tax- saving bonds. Infrastructure Development Finance Co (IDFC) and Larsen & Toubro (L& T) have launched the first series of their tax- free infrastructure bonds and are planning a relaunch and IFCI has issued two series of its bonds. Other infrastructure companies that will follow suit are India Infrastructure Finance Co Ltd (IIFCL), Rural Electrification Corp (REC) and PTC Financial Services.

Taxpayers can claim income tax deduction for investment of up to Rs. 20,000 in long- term infrastructure bonds under Section 80CCF of the Income Tax Act. This move was announced in Budget 2010 with the aim of channelising domestic savings into the infrastructure sector.

Under this regulation, the government has allowed lending by IFCI, IDFC, Life Insurance Corp of India (LIC) and non- banking finance companies exclusively to nfrastructure sector to raise money through these bonds.

Who Can Subscribe To These Bonds?

An Indian resident and Hindu undivided families (HUFs) can invest in these bonds. According to Naval Bir Kumar, managing director, IDFC Mutual Fund, any taxpayer who has exhausted the Rs. 1- lakh limit under Section 80C should consider investing in these bonds, especially those in the higher tax brackets.

As most of these bonds are highly rated long- term bonds, they are low- risk investment options, suitable for retired investors. They are not completely risk- free due to the risk of default in such bonds and investors should check the rating assigned to them. “ While putting their money in an infrastructure bond, investors should check its rating. A triple A rated (AAA) bond is a good taxsaving- cuminvestment option,” Kumar said.

The bonds can be issued in both demat and physical form. “ Since these bonds are aimed at all taxpayers, it is necessary to offer them in both forms as many tax- payers do not have demat accounts,” adds Kumar.

Minimum Investment And Lock-In Period

The minimum investment amount for these bonds is Rs. 5,000 and in multiples of Rs. 5,000. The tenure of the bonds is 10 years, with a minimum lock- in period of five years. Firms offer a buyback option after this period.

These bonds will be made available on the National Stock Exchange (NSE) and Bombay Stock Exchange (BSE) for trading after the lock- in period. After the five- year period, an investor can even take loans against these bonds. As these bonds are new to the investing arena, they don’t have an established trading market. There is no certainty that an active public market for these will develop in the future.

Expected Returns

Most infrastructure bonds that have been launched have a coupon (interest rate) between 7.5 and 8.25 per cent. The second series of bonds issued by IFCI had a coupon of eight per cent with a buyback option after five years and 8.25 per cent with no buyback option. IDFC, which is planning to come out with its second tranche of infrastructure bonds this quarter, may also offer the same interest rate (eight to 8.25 per cent) on its infrastructure bonds. Most firms are offering similar coupons because there is a cap on the interest rate on the infrastructure bonds paid by the issuer. The rate cannot exceed the yield on government securities of the same maturity period, which is based on the last working day of the month immediately preceding the month when the bond was issued.

The tax- adjusted yield on these bonds will differ on the basis of the income tax slab within which one’s income falls. Infrastructure bonds are an additional tax- saving avenue, you can consider them a good option if you have exhausted the Rs. 1 lakh limit under Section 80C. This is because many tax- savings instruments, such as ELSS, Ulips and NPS, offer better returns.

Vikas Vasal, executive director, KPMG, said that as it is an added option to save tax, investing in such bonds makes sense. He feels that the amount of tax one saves through these bonds is too less and the five- year lock- in period makes them less appealing.

For investors, in the 10 per cent tax category the maximum tax adjusted return is 10.77 per cent. Investing the same amount in a good equity mutual fund can fetch you 15- 20 per cent returns without locking it for five years, which could be a better option.