Infrastructure Bonds: Boost Your Tax Savings

Infrastructure Bonds: Boost Your Tax Savings

Section 80C of the Income Tax Act offers a maximum deduction of Rs1 lakh, for investments in national savings certificate (NSC), public provident fund (PPF), life insurance premiums, equity-linked savings schemes (ELSS) and pension plans. If you have already exhausted the limit of Rs1 lakh and wish to cut your tax outgo further, the government has, in this year's Union Budget, provided an added benefit of Rs20,000 for investments in infrastructure bonds. Under the new Section 80CCF, investments in government-approved long-term infrastructure bonds will be eligible for a deduction of up to Rs20,000 from the annual income, in addition to the existing limit of Rs1 lakh. This will be an additional tax saving for individuals. For instance, for an individual in the highest income tax bracket of 30%, the new instrument will offer tax savings to the tune of Rs6,000 annually not taking into account the education cess. There is no limit on investment in these tax-saving infrastructure bonds. They have a tenure of 10 years with a lock-in period of five years. As the money will be blocked for such a long period, consider investing only if you have the patience and no immediate liquidity needs. Investors can exit after the five-year lock-in period, either through the secondary market or through a buy-back option as specified by the issuer. After the lock-in period, these bonds can be pledged for loans from specified banks; the loan amount will depend on its market value and the credit quality of the instrument. To qualify for tax exemption, investments should be made only in the long-term infrastructure bonds specified by the government. These include bonds issued by Industrial Finance Corporation of India, Life Insurance Corporation of India, Infrastructure Development Finance Company and non-banking financial companies classified by the Reserve Bank of India as infrastructure finance firms. These bonds assure investors of a reasonable return on investment. However, the rate of interest and other terms and conditions will be specified by the issuer. Also, the yield will not be more than the yield on government securities of similar duration. These bonds are not yet in the market; issuers are likely to launch these bonds by the end of this fiscal. If you are looking for a low-risk investment, tax savings, and do not wish to put money in other risky products, it may be worthwhile to invest in infrastructure bonds.
Moneylife Digital Team