First let’s understand, what Infrastructure bonds are all about? These are bonds issued by various government and private companies to the general public with fixed interest rates for the purpose of developing the basic amenities of the country like roads, electricity, railways, airport, etc. As these infrastructures require a long time to develop, the infrastructure bonds issued are also typically long-term ranging from 10 years to 15 years and usually have a lock-in period of 5 years, with an option of buy-back by the company issuing it. The companies issuing such bonds are IFCI, IDBI, L&T, REC, LIC, ICICI, etc.
Now let’s see what we need to know about infrastructure bonds as a taxpayer.
- The taxpayer can save an additional amount in taxes if he/she invests in Infrastructure bonds. This is over and above the deductions allowed under section 80C, 80CCC, 80CCD of Income Tax Act, where maximum deductions allowed is Rs.100000/-.
- The section, which allows the additional tax deductions through infrastructure bond, is 80CCF of Income Tax Act.
- The maximum deductions allowed in this section is Rs.20000/- or the amount invested in these bonds, whichever is lower.
- Interest received, however, is taxable.
- Interest rates vary from 8% to 10% among various bonds.
- The infrastructure bonds can be held either in physical or demat form. If it is held in physical form and the interest earned is Rs.2500/- or more, TDS (Tax Deducted at Source) is applicable @10%. No TDS is applicable for demat holdings.
- The bonds are rated by various rating agencies as CARE, ICRA, etc.
Now that we know about infrastructure bonds, let’s see whether we should consider these for our investments.
Well, infrastructure bonds being an investment for the long-term should be used sparely and only if the deduction limits in other sections are exhausted, as the liquidity here is poor due to long lock-in period. However, as the deductions are over and above the deductions allowed under section 80C, which is Rs.100000/-, people falling in highest tax brackets may consider an investment here to save additional taxes. However, I would advise to exercise the buy-back option, if given, for the sake of getting liquidity and especially when there’s no long-term benefits for the taxpayer. Lastly, I would advise to stick to the government companies or to carefully scrutinize the ratings of a private company for keeping the investment safe.
I have also discussed about Tax-Saving Fixed Deposit here. So if you want to know about that too, please go and read about it.
Are you planning to invest in long-term infrastructure bonds? If yes, do tell me which ones you have selected. Or if you don’t have such plans, please tell me why?