Infrastructure Bond for tax saving

Infrastructure Bond for tax saving 1When it comes with Tax savings – Indians just love it! For many Indians, investment is limited to Tax Benefit only. What more one could ask for if the tax savings also gives you guaranteed return!

This budget Government had introduced another tax saving scheme under section 80CCF. Under this section, Government allowed additional deduction of Rs.20000/- apart from existing Rs.1 lac deduction as provided under 80C. The deduction would be allowed if the tax payer were to invest in special infrastructure bonds or named as Long Term Infrastructure Bonds as notified by government. Government has notified IFCI, IDBI, IDFC, LIC and NBFCs notified by RBI for issuing long term infrastructure bonds. Each bond will have their respective features but few of the below mentioned features shall be common for all.

  1. The interest on such bond shall not be higher than the yields prevailing for 10 year Government of India Bonds (G-sec) the time of issuance of such infra bonds. Currently, the yield on 10 year G-Sec is around 7.95%.
  2. The minimum lock-in shall be for 5 years but the minimum tenure of the bond shall not be less than 10 years. This means that if you want, you may remain invested for 10 years but in case, you wish to withdraw the amount, you may do so after 5 years. Exit windows shall be through Buy-Back facility by the issuer or through secondary market operations. In the second option, compulsory demat shall be required so as to facilitate buying and selling.
  3. Investment shall be multiples of Rs. 5000 and maximum of Rs.20000/-
  4. The Interest shall be taxable.
  5. After the lock-in period, investor may hold the investment and can avail benefit of Loan against this security.
  6. Only individuals and HUF can invest. Investment cannot be done NRIs and also in the name of a minor.
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Current Available Bond

IFCI have come up with such Infra bonds, the other features of such bonds are given below:

  1. The issue would close on 31st of August, 2010.
  2. Demat is compulsory for these bonds.
  3. Copy of PAN card is must.
  4. There is no TDS on interest, the tax has to be calculated at the end of Investor only.
  5. One may choose for Yearly Interest (every 15th September) or for cumulative interest, though cumulative interest option is better as compounding of non-payment tax would increase the yield.

The Interest on these bonds is as follows:

Options12
Lock-in for 5 yearsLock-in for 10 years
Buy Back OptionYesNo
Interest PaymentNANA
Interest Rate7.85% compounded annually7.95% compounded annually
Maturity DateSeptember 15, 2020September 15, 2020
Buy Back PeriodEvery Year Between August 16 to August 31, starting from Year 2015 till Year 2019Not available

Should you invest in these Bonds

Yes, it make sense to invest in bond as a good debt option and as said earlier, it would be wise to go for cumulative option. The following table would show you actual benefit an income tax payee would get at different levels of taxation. It makes more sense to invest the money for 5 year lock-in option. It would ensure that your liquidity is there after 5 years and in case you don’t require money, just don’t opt for redemption. Loosing just 0.10% interest p.a. to avail liquidity sounds a better option to us.

5 Years Cumulative Option(Int Rate 7.85%)

Years5 10 5 10 5 10
Interest Rate7.85% 7.95% 7.85% 7.95% 7.85% 7.95%
Tax Slab 10% 10% 20% 20% 30% 30%
Investment500050005000500050005000
Tax Benefit5005001000100015001500
Effective outflow450045004000400035003500
Redemption Amount729610745729610745729610745
Final Tax23057545911496891724
Amount After Tax7066101716837959666079022
Effective rate of return*9.45%8.50%11.32%9.14%13.55%9.93%

*After Considering all tax benefits.

What shall be the impact if Direct Tax Code where to come into picture?

The important factor here is that if DTC were to get implemented next year, this tax deduction will not be there. In other words, this tax saving tool could just be a one time affair for tax payers.

But if DTC were to implemented, the benefit that you derive on this investment would actually rise. The following table shall reveal that return on investment you can actually make if DTC were to get introduced. For calculation sake, we have assumed that currently you are taxed at 30% and we have not taken surcharge and any cess that is applicable.

5 Years Cumulative Option(Int Rate 7.85%)
Investment500050005000
Tax Benefit150015001500
Effective outflow350035003500
Redemption Amount729672967296
Tax Rate under DTC10% 20% 30%
Final Tax229459688
Amount After Tax706768376608
Effective rate of return15.09%14.33%13.55%

We shall keep you updated on the next issue of such 80CCF infra bonds.

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Hemant Beniwal is a CERTIFIED FINANCIAL PLANNER and his Company Ark Primary Advisors Pvt Ltd is registered as an Investment Adviser with SEBI. Hemant is also a member of the Financial Planning Association, U.S.A and registered as a life planner with Kinder Institute of Life Planning, U.S.A. He started his Financial Planning Practice & TFL Guide Blog in 2009. "The Financial Literates" is a dream & mission to make Indians Financial Literate.

21 COMMENTS

  1. I have been already investing 1,000 monthly in reliance regular savings for last 15 months and now it has become approx 18,000. Now about two months before i have started SIP of Rs 2,000 monthly in HDFC Tax Saver fund. My question is whether my decision is rights, if it is, then how much will I get after 10 years.
    I am also planning tominvest Rs 1,000 per month in some good tax saver fund, kindly guide me in this context also. Recntly I have read about the Infra Bond introduced by IDFC, please tell me whether it’s a good option than to enter in a mutual fund? Please also tell me whaether infra bond can be purchased once or on SIP basis?

    • Hi Rajendra

      It is a very wise decision to invest in mutual fund. People have to understand that even if they are putting money in NPS, ULIP or any other insurance policy it is a collective scheme. Mutual Fund is the most transparent & inexpensive way of investment; plus money management through professionals is an added advantage. As you are asking for investment in one more Tax saver fund – you can choose DSPBR Tax saver, it has consistently outperformed its pears. If I assume that you will invest total Rs 4000 in these funds for next 10 years & returns generate are 15% you will have a corpus of 11 Lakh at the end of period.
      Regarding your Infrastructure bond Query: From the Budget, infrastructure bonds are also eligible for additional tax exemption upto Rs 20,000 over and above Rs 1 lakh under Section 80C. The maturity period of these bonds is 10 years and the lock-in period is five years. These bonds will be listed on the Bombay Stock Exchange and National Stock Exchange. After completion of five years, you can keep these bonds for additional five years and withdraw money at the time of maturity. In case, if you need to withdraw money before maturity, then you always have an option to sell these bonds on stock exchanges. One must take it’s benefit if he is in 33% tax slab & already completed the limit of Sec 80 C.

  2. Dear Sir,

    Kindly guide which is the Infrastructure Flexibonds for taxsaving purpose (limit Rs. 20000/-) available at presesnt in the market ?

    Kindly advice.

    Ajay Nikam

  3. IFCI infrastructure bond is closing on december 31 2010. It is a very good opportunity to claim tax exemption on additional Rs 20,000. Infra bond is better option than SIP for 5 years.

  4. Hi Hemant,
    1. Which Infrastructure Bonds is good Banks or Infrastructure companies?

    2. Im in 30% slab, so if i take 20K bond in 1 comany can i take more 20K in other company n can show 40K in savings?

    3. Will the IB comes in every March only?

    4. when the next IB comes?

    Thanks for all help and support……for providing valuable information…. this is like “earning knowledge..before earning money from market”.

    Thanks

    • Hi Vijay,

      Max limit is Rs 20000 for a tax payer.

      IB will start coming in couple of months – so you can buy as soon as there are new issues.

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