From Outlook Money
Are infrastructure bonds worth the hoopla?
Since the finance minister mentioned of infrastructure bonds in his 2010 Budget speech in March, the investing space has been abuzz with speculation. Last week, the finance ministry allowed Industrial Finance Corporation of India, Life Insurance Corporation of India, Infrastructure Development Finance Company or any other non-banking finance company which is an infrastructure company to issue these bonds in the financial year 2010-11.
Tax savings. Long-term infrastructure bonds would have a maximum investment limit of Rs 20,000 per investor and it would come with a tax benefit under Section 80 CCF. This deduction would be over and above the limit of Rs 1 lakh under Section 80C. For those paying 10.3, 20.6 or 30.9 percent tax, the extra savings on tax on investment of Rs 20,000 would be Rs 2,060, Rs 4,120 or Rs 6,180, respectively. The bonds would be for a term of 10 years with a lock-in of five years.
Return. The interest rate would be fixed as per the yield of the government security of the same maturity at the time of issuing of these bonds. The interest would, in all probability, be taxable in the hands of the investor in the year of receipt although such specification would be disclosed by individual issuer of such bonds.
Should one invest? For those who have utilised the Section 80C benefit, any investment in these bonds saves tax according to their tax rate. But for those who haven’t made use of the existing limit of Rs 1 lakh so far, the taxability clause of interest on these bonds remains to be seen. A notified bank FD for a 5-year period may give you a slightly better coupon rate. Assuming a coupon of 7.5 per cent, the post-tax return could be in the range 5.18 to 6.7 percent, tax-free. Considering the additional deduction as per the slab, it’s an investment worth considering.
Tax savings. Long-term infrastructure bonds would have a maximum investment limit of Rs 20,000 per investor and it would come with a tax benefit under Section 80 CCF. This deduction would be over and above the limit of Rs 1 lakh under Section 80C. For those paying 10.3, 20.6 or 30.9 percent tax, the extra savings on tax on investment of Rs 20,000 would be Rs 2,060, Rs 4,120 or Rs 6,180, respectively. The bonds would be for a term of 10 years with a lock-in of five years.
Return. The interest rate would be fixed as per the yield of the government security of the same maturity at the time of issuing of these bonds. The interest would, in all probability, be taxable in the hands of the investor in the year of receipt although such specification would be disclosed by individual issuer of such bonds.
Should one invest? For those who have utilised the Section 80C benefit, any investment in these bonds saves tax according to their tax rate. But for those who haven’t made use of the existing limit of Rs 1 lakh so far, the taxability clause of interest on these bonds remains to be seen. A notified bank FD for a 5-year period may give you a slightly better coupon rate. Assuming a coupon of 7.5 per cent, the post-tax return could be in the range 5.18 to 6.7 percent, tax-free. Considering the additional deduction as per the slab, it’s an investment worth considering.
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