×
Home Companies Industry Politics Money Opinion LoungeMultimedia Science Education Sports TechnologyConsumerSpecialsMint on Sunday
×

High income taxpayers can gain from infrastructure bonds

High income taxpayers can gain from infrastructure bonds
Comment E-mail Print Share
First Published: Sun, Sep 05 2010. 10 51 PM IST
In the last Budget, a new provision for tax-saving investments, section 80CCF, was added to the Income-tax Act. This provision allows for a deduction of Rs20,000 for investments made in notified long-term infrastructure bonds. This deduction is separate and is in addition to the deduction available under section 80C for other investments such as life insurance premium, provident fund, Public Provident Fund, National Saving Certificates, etc.
Recently, the Union government notified the eligible issuers and the terms of such bonds. IFCI Ltd has now come out with the first such issue of infrastructure bonds. The bonds will give an interest, which is taxable, of 7.85%. Given the rate of return post-tax, is it worthwhile subscribing to these bonds?
What you need to keep in mind is that when you invest Rs20,000 in these bonds, assuming that you are in the highest tax slab of 30.9%, you will immediately save a tax of Rs6,180. Your net investment is therefore only Rs13,820. On this, the interest of Rs1,570 works out to a pre-tax yield of 11.36%, and a post-tax yield of 7.85%, which is fairly decent.
In fact, when one factors in the fact that the bonds would be redeemable at par, the rate of return is much higher on account of the tax benefit which one has obtained in the year of investment. You have a choice of opting for bonds with a buy-back option, where the lock-in period is five years and the rate of interest is 7.85%, or bonds without a buy-back option, where the bonds would be redeemed after 10 years but the rate of interest would be higher at 7.95%. Which option is more attractive?
Obviously, the bonds with the buy-back option is superior in terms of post-tax yield at 14.54% for investors in the top tax slab, opposed to the post-tax yield on the 10-year tenor bonds of only 10.67%, on account of the fact that the tax benefit is spread over a shorter period of five years instead of 10 years. For those in the 20% tax slab, the post-tax yields on the bonds over a five-year term works out to a lower 11.94% due to a lower tax benefit, while the post-tax yield for the 10-year bond works out to 9.61%—still an attractive proposition!
Besides buy-back, an investor may also choose to dispose off his bonds through a sale of the bonds. Such sale can also take place only after five years from the date of acquisition of the bonds. Of course, on a sale the capital gains (if any) would have to be computed without any cost indexation benefits since bonds are not eligible for such indexation.
Interestingly, the notification states that the bond shall also be allowed as pledge or lien or hypothecation for obtaining loans from scheduled commercial banks after the lock-in period. There is no specific prohibition on taking loans from other entities (such as non-banking financial companies, or NBFCs) against such bonds during the lock-in period of five years. Interestingly, unlike in the case of capital gains bonds, where there is a specific prohibition in section 54EC against taking loans against the bonds within three years and a provision that in case a loan is taken against such bonds within that period, the exemption granted will be withdrawn in the year in which the loan is taken, there is no such prohibition or consequence provided in section 80CCF.
Life Insurance Corp. of India (LIC), Infrastructure Development Finance Co. Ltd and NBFCs classified as infrastructure finance companies would also be allowed to issue such bonds. The government has notified that the interest rate on infrastructure bond issues should not exceed the 10-year yield on government securities prevailing at the month-end preceding the issue date. The interest rate on future issuances of infrastructure bonds may therefore vary depending upon the prevalent yields of 10-year government securities. Considering the fact that the investment would be of only Rs.20,000, the changes in interest rates for other infrastructure bond issues may not have a significant effect on the income.
From reports, one gathers that LIC is also contemplating providing free insurance cover to bondholders who subscribe to its infrastructure bonds. While that would be an added benefit to an investor, there would be no additional tax benefit in respect of such cover, as no premium would be actually paid by the investor.
All in all, infrastructure bonds seem to be an attractive investment for taxpayers in the 30% and 20% tax slabs. One only wishes that the permitted investment limit were higher!
Gautam Nayak is a chartered accountant. Your comments are welcome at mintmoney@livemint.com
To read all of Gautam Nayak’s earlier columns, go to www.livemint.com/beyondthetaxbook
Comment E-mail Print Share
First Published: Sun, Sep 05 2010. 10 51 PM IST