Infrastructure bonds are back, with the Budget giving you one more opportunity to save on income tax. You will now be able to invest in these bonds and claim a deduction of up to Rs20,000, besides the existing tax breaks under section 80C.
The new deduction comes under section 80CCF.
“Retail investors will have one more avenue to participate in the infrastructure projects,” said Anup Bagchi, executive director, ICICI Securities.
In addition to Rs30,900 that you save by investing in 80C instruments, you would now save an additional Rs6,180 (30.90% of Rs20,000) by investing in these infrastructure bonds under section 80CCF, assuming you are in the highest tax bracket.
Money raised from the sale of the bonds will go towards bolstering India’s tottering infrastructure.
“The concept of issuing infrastructure bonds is good,” said Suneet Maheshwari, chief executive, L&T Infrastructure Finance Co. Ltd. “The Budget has incentivized it by giving it a tax impetus and the money would be available to infrastructure-lending companies at a lower cost.”
Buying infrastructure bonds to claim income tax deduction is not new. Till 2005, when section 88 of the Income-Tax Act 1961 was in force, you could invest a maximum of Rs30,000 in these—besides the Rs70,000 for other tax-saving instruments, such as equity-linked saving schemes (ELSS), National Savings Certificates and Public Provident Fund—to claim a maximum tax benefit of 20%. Taxpayers were also allowed to invest the entire Rs1 lakh—the limit under section 88—in infrastructure bonds.
The 2005-06 Budget scrapped Section 88—along with Sections 80L, 80CCC, 80CCD and 80C—and introduced section 80C, which removed individual limits of all the categories of tax-saving instruments.
It instead allowed an investment limit of Rs1 lakh for all eligible tax-saving instruments. Since infrastructure bonds provided returns of between 7% and 7.7%, taxpayers gravitated towards ELSS, which as an equity investment vehicle had the potential to deliver better returns.
Friday’s Budget proposals have now revived the tax-deductible infrastructure bonds by creating a fresh limit of Rs20,000 just for them and putting them separately under a new section.
There are two issues to consider before buying these bonds. The fine print says the bonds will be notified by the Central government. Expect this to come in a month or two, industry experts said.
Until then, it is unclear whether private companies would be allowed to issue such bonds or the option to raise money by issuing bonds will only be given to government companies.
“Our company also lends to the infrastructure sector, but we have to wait for the notification to see if we are allowed to issue such bonds,” said Maheshwari. Secondly, the tenure of the bonds has not been specified. Typically the tenure of the infrastructure bonds sold when Section 88 was around was three to five years.
The Budget has only said the new incarnation would be “long-term,” without putting a number to it. “The bonds could be for a minimum of five years or maybe as high as 10 years,” said Bagchi.
Also, unlike in the earlier version, where interest earned from these bonds was also tax-deductible to a certain extent, the new avatar will not offer any such benefit as Section 80L has long been abolished.
Interest from the bonds are likely to be taxed at the appropriate income tax rates. It would be interesting to see the interest rates of these new infrastructure bonds and how competitive they would be.