The Union Budget 2011 introduced a new section 80CCF under the Income Tax Act, 1961 that provide income tax deduction of Rs. 20,000 in addition to Rs 1 Lakh available under other provisions for claiming tax deductions for investments made in the Long Term Infrastructure Bonds that are notified by the central government.
This is seen as a step to attract individuals and HUFs to invest and participate in the infrastructure projects in India. India aims to spend $500 billion on infrastructure in the five years to end March 2012 and the government has set a target to double investment in the sector to $1 trillion between 2012 and 2017. The deduction can be claimed by individuals or HUFs for the investments made in subscribing the long term infrastructure bonds during the FY 2010-11
Any investment in long term infrastructure bonds upto Rs 20,000 is eligible for tax deduction from the taxable income. This means for an individual falling under 30% tax bracket will effectively save Rs 6,180 and a lower tax bracket individual of 10% will save tax upto Rs 2,060
These long term infrastructure bonds will be available for tenure of minimum 10 years and the lock-in period of 5 years. It means investors can not exit from the bonds before 5 years and after 5 years they have an option to exit in the secondary market or via buyback offer given by the issuer. the price at which buy back or traded in the secondary market will depend upon the instrument's quality at that time. Investors can also pledge the bonds in some specified banks to obtain the loan against the bonds only after completing the lock-in period.
The Issuers have the choice to fix what rate they offer.
Industrial Finance Corporation of India (IFCI):
IFCI’s bonds have four options to choose from, offering an interest rate of 7.85 percent and 7.95 percent annually, with options such as buyback/non-buyback with cumulative/non-cumulative interest rates.
While Option I and Option II offer 7.85 percent annual return and a buyback facility exercisable after 5 years, Option III and Option IV can get investors 7.95 percent annual returns, with redemption possible after 10 years.
LIC of India (LIC):
These infrastructure bonds offer interest rate of 6% pa which is taxable . However the effective pre-tax yield works out to be 11.36% and post tax yield of 7.85% . Compared to Fixed Deposits, Infrastructure bonds are a better option to combat inflation.
Infrastructure Development Finance Corporation (IDFC):
The issue Opened on 30 September 2010 Closed on Monday, October 18, 2010.Over and above Rs 1 lakh tax rebate available, for other long term securities, the Bonds are tax exempt up to Rs 20,000/- The Bonds have a face value of Rs 5000 and carries interest rate of 8% annually or 7.5% with a buy back option.
The Bonds will be issued in four series with 8% payable annually, cumulative option compounded annually, 7.5% payable annually with a buy back option and 7.5% compounded annually with a buy back option. The IDFC Bonds with a lock in period of 5 years is to be listed in both National Stock Exchange(NSE) and Bombay Stock Exchange (BSE).The Bonds have been rated by ICRA under "LAAA" category, which carries highest safety and stable outlook.
Non-Banking Finance Company (NBFCs) who are classified as an infrastructure finance company by the Reserve Bank of India (RBI) :
L&T Infrastructure Bond Issue, 2010 which opened for public subscription from October 15th and will close on November 2nd 2010
Banks will be allowed to raise tax-free infrastructure bonds after they take government permission to notify the bonds under the infrastructure bond category. The finance ministry has told banks that they would be allowed to issue infrastructure bonds provided the proceeds of the issue is utilised only for infrastructure development.
So many more will come.
If you are looking for building up the corpus for your retirement, you should go for equity for 20-30 years. if you already have a corpus build up, then park a part of it in these bonds to give stability to the corpus. But they are not a good option, to increase wealth.
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