Infrastructure Bonds: To invest or not to invest?

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BUDGET 2010 saw the Finance Minister doling out sops to push infrastructure investments in the country. One key sop - the tax benefit to individuals on investment of up to Rs 20,000 in infrastructure bonds under section 80CCF. And this, over an above the current limit of Rs 1 lakh that section 80C provides.

The Central Board of Direct Taxes (CBDT) has now notified New Infrastructure Bonds. An individual or Hindu Undivided Family (HUF) can invest in these new infrastructure bonds up to Rs 20,000 in a financial year. LIC, IFCI, IDFC and other NBFCs classified as Infrastructure Company by RBI will be allowed to issue these bonds, called Long Term Infrastructure Bonds.

The minimum application amount for these bonds is Rs 5,000 and multiples thereof for each option.

The issue opens on August 9, 2010 and closes on August 31, 2010.

Features of the bond:

- The bonds will be of 10 year tenure

- The minimum lock in period for an investor shall be five years. After 5 years the investor may exit either through the secondary market or through a buyback facility, specified by the issuer in the issue document at the time of issue.

- Permanent Account Number is must to apply these bonds.

- These infrastructure bonds are not tax free. Interest on these bonds is taxable in the hands of investor, however, no TDS is deducted from interest.

- A demat account is mandatory to apply; any application without demat account details would be rejected. Submitting an attested pan card copy of the first holder is also compulsory while applying.

- The coupon rate for the bonds is as follows:

Frequently Asked Questions on IFCI Long Term Infrastructure Bonds

What is the Tax Treatment of interest on these Bonds?

The interest received on these bonds shall be treated as income from any other source and shall form part of the total income of the assessee in that financial year in which they are received.

Who are the eligible investors?

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

Can a Minor apply for subscription to these bonds?

A minor is not eligible to apply for subscription to these bonds.

Are these infrastructure bonds Tax Free?

No, the interest received in these bonds are not tax free. The investor is liable to pay tax on the interest received.

Will TDS be deducted on these bonds?

No TDS shall be deducted on the interest received as these bonds are issued compulsorily in Demat mode and shall be listed on Bombay Stock Exchange.

I don’t have Demat Account. Can I apply?

The bonds shall be compulsorily issued in Demat mode, so investors without demat shall not be eligible.

I only have a joint De-mat account. Can I apply in my own name only?

The name of applicant shall be same as the holders of Demat account. In case of single applicant the demat account shall also be held in the name of the same single applicant.

Can I apply in joint names?

Yes application can be made in joint names with a maximum of three applicants, however the demat account shall also be held in the joint names and order of applicant shall be the same as appearing in the demat account.

What is the maximum amount for which the benefit u/s 80CCF be availed?

Maximum benefit to an investor shall be Rs. 20,000/- under section 80CCF of the Income Tax Act, 1942

What would happen if I apply amount more than Rs. 20,000/-?

The allotment shall be made for the sum applied, however the benefit under section 80CCF may only be availed for a maximum sum of Rs.20,000/-

Can I invest in all the four option?

Yes an applicant may subscribe to all the four options but the minimum application under each option shall be one bond i.e. Rs.5000/-

What is the benefit of investing in Tax Free Infrastructure Bonds if they offer the same tax benefit?

The Tax exemption benefit on a sum of Rs. 20,000/- is over and above Rs. 1,00,000/- benefit under section 80C, 80CCC and 80CCD

What is the tenure & lock-in period of these Tax Free Infrastructure Bonds?

The maximum maturity period of these bonds shall be 10 years however there shall be a buy back option at the end of 5th year onwards. After the end of 5th year the investor shall have the option to participate in the buy back offer by the issuer which shall be open between 16th August to 31st August every year from the end of 5th year till the maturity of the bonds.

Who can offer these Long Term Infrastructure Bonds?

The entities like LIC, IDFC, IFCI and other NBFCs which are classified as Infrastructure Finance Companies by RBI shall be allowed to issue these long term infrastructure bonds.

I Don’t have a PAN card. Can I still apply for subscription?

PAN card is mandatory for subscribing to these bonds. A self attested copy shall be enclosed along with the application form.

How will I get my interest on the due date?

The interest shall be credited to the respective Bank registered with the Demat account through ECS on the due date for interest payment. And if the due date is a public holiday then the next working date.

Can I get loan on these bonds?

Yes, these bonds may be mortgaged or pledged to avail the loans after the lock in period.

Where shall I submit the application forms?

The application form may be submitted at the office of the arranger or at the office of IFCI.

Who shall pay the interest and repay the Principle amount?

IFCI Limited shall pay the interest on these bonds and also the principle amount to the investor upon maturity of the bonds or at the time of buy back

Can I apply in joint names?

Yes, application can be made in joint names but the tax benefit shall only be availed by the first applicant.

Who would get the interest in case of the joint application?

In case of joint application the interest shall be paid to the account of the first applicant only.

A list of Do’s and Don’ts to keep in mind

Do’s

• Check if you are eligible to apply
• Sign the application wherever required
• Attach a copy of self attested PAN Card along with the application form
• In case of HUF applicant kindly put the stamp of HUF on the application form
• Ensure that you mention the PAN no. allotted under the IT Act on the application
• Check that you have mentioned correct DP Name, DP ID and Client ID on the application form
• Check there is no name mismatch with the Demat account
• In case of joint application check that the name on application form appears in the same order as it appears in Demat account
• Read all the instruction carefully and complete the application form
• Application shall be signed by Karta in case of HUF

Don’ts

• Do not apply for an amount lower than the minimum application
• Do not pay the application money in cash
• Do not submit unsigned application

Here is a take on the pros and cons of investing in infrastructure bonds for tax saving purposes.

Tax groups post budget 2010.
Tax group 1: Taxable income Rs. 1.6-5 lakhs
Tax group 2: Taxable income Rs. 5-8 Lakhs
Tax group 3: Taxable income above Rs. 8 lakhs.

To understand the pros and cons of tax saving investments we need to look at 4 major parameters:
Parameter 1 : Actual tax saving (let’s take the highest saving possible)
Parameter 2 : Returns from the investment (during the lock in period)
Parameter 3: Opportunity cost (what if you had invested the same money elsewhere?)
Parameter 4: Effect of inflation on the returns on investment (what would the worth of your investment when you redeem/encash it?)

Assumptions
For the sake of parameter two we will have to take an assumption on the lock-in period (as nothing has so far been announced by the Finance Minister). As is generally the case with most tax saving instruments we can assume two scenarios—3 year and 5 year lock-in

Let’s assume the rate of return on infrastructure bonds is 5.5 per cent per annum and overall rate of inflation is 8 per cent.

For people in the 1.6- 5 lakh taxable income group:

As per the new norms the income will be taxed at a rate of 10 per cent for this group.

Parameter 1:
Actual tax saving: 10 per cent of Rs 20,000 = Rs 2000

(If you invest Rs 20,000 in the instrument you get to reduce your taxable income by 20,000 thus giving a 10 per cent benefit)

Parameter 2:
What will be the returns at the end of the lock in period? For a lock in period of 3 years an investment of 20,000 would fetch an income of Rs. 3484. When added to the tax saved you'll get an effective return of Rs 25485 (Rs 20000+3484+2000) on your investment

Parameter 3:
If this same amount were to be invested in a market instrument that fetched a return of 15 per cent, you would get an effective return of Rs 27, 376 (Rs 20000-2000=Rs 18000 invested @15 per cent per annum for 3 years)

Parameter 4:
What would be the minimum amount required to counter inflation at 8 per cent? The amount would be Rs 25, 194.

Thus for a person in the slab of 1.6-5 lakh the benefits of investing in an infrastructure bond as a tax saving instrument will be only Rs 291 (Rs 25485-25194) whereas the benefit out of paying the tax and investing the balance in any decent instrument would be Rs 2182.

Bottom-line
If you fall under the Rs 8 lakh taxable income slab, it makes sense to opt for the infrastructure bonds as a tax saving instrument.
If you are under the 5-8 lakh bracket it is advisable to invest in infrastructure bonds only if the period of investment is 3 years, not five years.
If you come under the 1.6-5 lakh bracket it is an absolute no-no to invest in infrastructure bonds for tax saving purpose.