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Invest in Long Term Infrastructure Bonds to Save Tax

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long term infrastructure bondsIn the Union Budget 2010, Finance Minister, Pranab Mukherjee proposed a new section 80CCF under the Income Tax Act of 1961. From April 1, 2010, section 80CCF would provide an additional tax deduction, over and above the existing 80C deduction, in respect to investments made in long term infrastructure bonds.

Background on Infrastructure Bonds

Infrastructure Bonds are not new to the country. They have been used by the government in the past years, for infrastructure projects. These bonds were earlier offered by financial institutions such as ICICI and IDBI, and had a lock in period of 3 years. Section 88 of the Income Tax Act offered tax deductions on investments of up to Rs 30,000, in these infrastructure bonds. However, with the 2005-2006 union budget, section 88 was scrapped.

So What Does Section 80 CCF Offer Tax Payers?

Section 80C currently offers a maximum deduction of Rs 1 lakh, for investments in National Savings Certificate (NSC), Public Provident Fund (PPF), Life Insurance premiums and Pension Plans.

The new section 80CCF will offer a deduction of Rs 20,000, in addition to the deduction of Rs 1 lakh under sections 80C, provided the investments are in notified long term infrastructure bonds. The government has proposed this section to promote investments in infrastructure projects in the country.

Key Features of 80 CCF and Infrastructure Bonds

-Section applicable from start of April 2010 and would be issued in the financial year 2010-11.

-Deduction limit of Rs 20,000 in addition to the 1 lakh limit under sections 80C.

-Investments to be in long term infrastructure bonds as specified by the government.

-The long term infrastructure bonds will have tenure of 10 years.

-Minimum lock in period of 5 years.

-Exit from the infrastructure bond, after the lock in period, will be either through the secondary market or through buyback option, as specified by issuer.

-The infrastructure bonds could be pledged for loans from specified banks after the lock in period.

-Investments in infrastructure bonds would require PAN to be mandatorily furnished.

Who can claim this additional deduction?

Section 80CCF is applicable to Individuals and to Hindu Undivided Family (HUF) only. Deductions could be up to a maximum amount of Rs 20,000 from the taxable income, for any amount invested in long term infrastructure bonds from financial year 2010-11.

Specified Long Term Bonds that Qualify under this Section

Bonds issued by the following agencies would qualify for tax benefit under section 80CCF.

-Industrial Finance Corporation of India

-Life Insurance Corporation of India

-Infrastructure Development Finance Company

-Any non-banking finance company which has been classified as an infrastructure finance company by the Reserve Bank of India.

Currently, IFCI has come out with its first issue of long term infrastructure bonds. The issue opened on 9th August 2010 and closes on 31st August 2010. The bonds with a tenor of 10 years have a buy back option after 5 years. The yield on redemption offered by these bonds is between 7.85%-7.95% p.a., depending on the option chosen by the investor..

Infrastructure Bonds – Benefit

Investment in long term infrastructure bonds would give you the following benefits:

Tax Saving – A long term infrastructure bond offers a tax benefit in the form of a deduction. The amount of tax saved would depend on the tax bracket one would fall under. To illustrate this benefit :

For a person in the highest tax bracket, a Rs 20,000 investment in long term infrastructure bonds could save a tax of around Rs 6,000 (Rs 20,000 X 30%)

For a person in the 20% tax bracket, an investment of Rs 20,000 in long term infrastructure bonds could give him a saving of around Rs 4,000 (20,000 X 20%).

(Education cess ignored in illustration to keep it simple)

Assured Returns – An investment in infrastructure bond assures you a reasonable rate of return. So as an investor you are guaranteed peace of mind over your investment!!!!

Concluding Thoughts

InvestmentYogi wants you to keep in mind the following while investing in long term infrastructure bonds.

-A long term investment with a period of 10 years and a lock in feature could block your money. So take a call after considering your financial situation.

-Infrastructure bonds offer pre-determined interest rates, which may be lower than other investment options; hence they may not offer much protection against inflation.

-Borrowing money by pledging infrastructure bonds with banks would fetch you an amount, which would depend on the market value of the bond. Banks also take into account the credit ability of the underlying issuer, in their loan evaluation process.

-The yield of the bond along with its terms and conditions will be specified by its issuer. However it must be understood that the yield of the long term infrastructure bond will not be higher than the yield of other government securities or corresponding residual maturity schemes.

Courtesy: InvestmentYogi

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