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.
- 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%.
- 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.
- Investment shall be multiples of Rs. 5000 and maximum of Rs.20000/-
- The Interest shall be taxable.
- After the lock-in period, investor may hold the investment and can avail benefit of Loan against this security.
- Only individuals and HUF can invest. Investment cannot be done NRIs and also in the name of a minor.
Current Available Bond
IFCI have come up with such Infra bonds, the other features of such bonds are given below:
- The issue would close on 31st of August, 2010.
- Demat is compulsory for these bonds.
- Copy of PAN card is must.
- There is no TDS on interest, the tax has to be calculated at the end of Investor only.
- 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:
|Lock-in for 5 years||Lock-in for 10 years|
|Buy Back Option||Yes||No|
|Interest Rate||7.85% compounded annually||7.95% compounded annually|
|Maturity Date||September 15, 2020||September 15, 2020|
|Buy Back Period||Every Year Between August 16 to August 31, starting from Year 2015 till Year 2019||Not 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.
*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.
We shall keep you updated on the next issue of such 80CCF infra bonds.