Infra bonds are here to stay

Infra bonds are here to stay

Tax-saving infrastructure bonds, which offer a tax-deduction benefit of up to Rs20,000 under section 80CCF, will continue for one more year, as per Budget 2011. Last year, the budget had carved out a special tax deduction limit of Rs20,000 over and above the Rs1 lakh tax deduction limit already available under section 80C.

Last year, after the budget announced the tax deduction limit, the Central Board of Direct Taxes (CBDT) notified three infrastructure finance companies—Infrastructure Finance Corp. of India (IFCI), Life Insurance Corp. of India (LIC), Infrastructure Development Finance Co. Ltd (IDFC)—apart from any non-banking finance company that the Reserve Bank of India so classifies as an infrastructure finance company. “Since this year, the budget specifically made a mention about tax-saving infrastructure bonds, I presume the CBDT would issue a fresh notification that will notify which infrastructure companies can issue tax-deduction bonds, but I think they would be the same companies that were allowed last year," said an IDFC official who did not want to be quoted because he is not the official spokesperson.

However, an expected increase in the Rs20,000 limit did not take place. “I am happy that the section 80CCF facility got extended, but that these bonds were only extended by a year is a disappointment. Creating a bond market takes a long time. If you want to popularize it, you have to keep issuing these bonds regularly," said Suneet K. Maheshwari, chief executive officer, L&T Infrastructure Finance Co Ltd.

Classified as long-term infrastructure bonds, these are 10-year debt instruments. Though you can invest over Rs20,000 in infrastructure bonds, the tax deduction is allowed only up to Rs20,000.

On account of the longer gestation periods of such infrastructure projects (time taken to complete the project and start making money), these bonds are long term, which means at least 10 years. These bonds cannot offer a coupon rate higher than the 10-year government security yield of the last day of the month that preceded the one in which the issue hits the market.

To discourage investment in liquid funds to avail tax arbitrage, budget 2004 increased the dividend distribution tax on dividends paid to corporate to20%, up from12.5%.

The 1991 budget paved the way for non-resident Indians to invest in the domestic property market. Earlier, they were required to get permission under section 31 of the Foreign Exchange Regulation Act.