Are Infrastructure bonds a win-win situation both for infrastructure financiers as well as investors ?

LONG TERM INFRASTRUCTURE BONDS U/s 80CCF OF INCOME TAX ACT 1961

In the last budget Finance Minister in Union Budget had introduced a new section 80CCF under the Income Tax Act, 1961 that provide income tax deduction of Rs. 20,000 in addition to Rs 1 Lakh available under other provisions for claiming tax deductions for investments made in the Long Term Infrastructure Bonds that are notified by the central government.

Few months back these  bonds were the talk of the town . Most taxpayers are happy that they have one more source to save taxes from this year. Till last to last year, they could invest only Rs 1 lakh and save tax of Rs 30,900 if they were in the highest tax bracket(30.9 %) under Section 80C of the Income Tax Act. Now, from the last year, investors can invest an additional Rs 20,000 in infrastructure bonds under Section 80CCF.The deduction can be claimed by individuals or HUFs(under the income tax Act, a Hindu undivided family is treated as a separate entity for the purpose of assessment.Generally the head of h.u.f is called as KARTHA . As long as h.u.f. exists, individual members cannot be separately assessed in respect of h.u.f's income ) for the investments made in subscribing the long term infrastructure bonds during the FY 2010-11.


As per the notification given by the central government, the bonds issued by following entities are eligible to subscribe as long term infrastructure bonds and eligible for a deduction under new section 80CCF
Industrial Finance Corporation of India (IFCI), Life Insurance Corporation of India (LIC), Infrastructure Development Finance Company (IDFC) and Non-Banking Finance Company (NBFCs) who are classified as an infrastructure finance company by the Reserve Bank of India (RBI).

Benefits of Tax savings for Long Term Infrastructure Bonds
Any investment in long term infrastructure bonds up to Rs. 20,000 is eligible for tax deduction from the taxable income. In effect, people in the highest tax bracket (30.9%) can now save an additional Rs 6,180 from this year.This means for an individual falling under 30% tax bracket will effectively save Rs 6,180 and a lower tax bracket individual of 10% will save tax up to Rs 2,060.

Lock-in period & Yield of the bond These long term infrastructure bonds will be available for tenure of minimum 10 years and the lock-in period of 5 years. It means investors can not exit from the bonds before 5 years and after 5 years they have an option to exit in the secondary market or via buyback offer given by the issuer. Investors can also pledge the bonds in some specified banks to obtain the loan against the bonds only after completing the lock-in period.Yields of the long term infrastructure bonds and other detailed terms and conditions are specified by the issuers at the time of launch on the respective bonds. However, the important thing to note is the yield will not be higher than the yield of government securities of corresponding residual maturity schemes. Currently, the 10-year government bonds is close to 8% and the interest rate offered by L&T Infra issue, currently open, is between 7.5% and 7.75%, depending on the options the investor  choose.

Who are Eligible Investors?

Only Resident Individual (Major) and HUF can invest in these bonds.

Is interest earned on these bonds taxable?

The interest received in these bonds is not tax free. The investor is liable to pay tax on the interest received. The interest received on these bonds shall be treated as income from other sources and shall form part of the total income of the assessee in that financial year in which it is received. However no TDS shall be deducted on the interest received as these bonds if issued in Demat mode and listed stock exchange.

Should one Invest ?

This is the most interisting question :)

Though, it’s mentioned that the interest rate on these bonds are 8% or 7.5%, the interest earned would reduce further to 5.5%-6% range when we count the tax paid on interest. But if we look at it from a different perspective, and count your money saved due to the tax-exemption at the time of investing, in that case the return would turn out to be around 9.5%-10%, but  I do you think it’s the right way of looking at returns .

But if one fall in 30% tax slab -he would directly save 6180 .

What may be potential pitfalls

1. One could potentially be stuck with a lower interest rate if interest rates climb up in the future.

2. Most Infrastructure bonds compound annually, whereas some of the bank fixed deposits might compound quarterly which gives one a  if one slight  advantage if one invest in FD .

What Infrastructure bond gurantee ?

Boost in the financing for infrastructure projects in India.