Tax Free Infrastructure Bonds
Keeping the promises which the finance minister made in his budget speech, the govt has come out with the necessary details and guidelines for investing in Tax Free Infrastructure Bonds for the purpose of saving taxes.It is an attempt to boost the investments in the infrastructure sector, which is the need of the hour and by providing tax benefit on such Tax Free Infrastructure Bonds, it is being made more attractive for all classes of investors.
IDFC Infrastructure Tax Saving Bonds Issue Now Open: See IDFC Infrastructure Bonds: Review, Analysis & Effective Returns Calculations
What is the available limit for tax benefit in Tax Free Infrastructure Bonds?:
The amount of money which can be invested in these Tax Free Infrastructure Bonds is not having any limit, but the tax benefit will be available only on a maximum of 20,000 Rs. i.e. if you fall in 30% tax bracket, then by inveting 20,000 in these Tax Free Infrastructure Bonds, you can save a 6,000 Rs. in taxes. You can invest more as per your wish, but the maximum tax to be saved will remain 6,000 only.
So what is the benefit of investing in Tax Free Infrastructure Bonds if they offer the same tax benefit?
There is a good benefit. The investment in these Tax Free Infrastructure Bonds are considered to be a part of section 80(C), but the 20,000 amount will be treated as a seperate amount over and above the 80(C) limit of 1 Lakh. i.e. You can continue to make investments of Rs. 1L under section 80(C) in your regular Provident Fund, LIC policies and so on but if you invest additional 20K in Tax Free Infrastructure Bonds , then your total eligible limit of tax exemption increases to 1.2 Lakhs.
However, please note that this extra 20K is reserved exclusively for Tax Free Infrastructure Bonds and not for any other investments. Any other investments falling under section 80(C) will still be capped at 1L.
What is the tenure & lock-in period of these Tax Free Infrastructure Bonds ?
Contrary to what the investors used to see during the 2000-2001 period, where Tax Free Infrastructure Bonds used to have a short term maturity of just 3 years, things are quite different this time.
The Tax Free Infrastructure Bonds will now have a long tenure of 10 years. However, the lock-in period will be 5 years which means that after completion of 5 years, the investors can opt out or redeem its invested amount
It is also not know how will the interest payment be allowed - whether yearly or only on maturity. My guess is that interest or coupon payment will depend upon the issuer of the Tax Free Infrastructure Bonds .
Who can offer these Tax Free Infrastructure Bonds?
As of now, the government is restricting that to only a few Infrastructure companies or Infrastructure Finance related companies. That means only institutions like IDFC, LIC, IFCI can offer these bonds. So the credit worthiness of these organizations will play a major role in deciding the Tax Free Infrastructure Bonds ratings and the returns they will offer. The tax benefit will be irrespective of the coupon payment offered.
Good thing is that the government will offer guarantee for these Tax Free Infrastructure Bonds . You might also see some private players being allowed to issue and float such Tax Free Infrastructure Bonds , but there is no clear news on that now. It is also not known whether the bonds issued by Private players will be having government guarantee or not.
Final Thought about Tax Free Infrastructure Bonds - should someone invest in it?
Now that's a million dollar question.
All Tax Saving Infrastructure Issues open Now:
IIFCL Infrastructure Bonds for Tax Saving - Closing 4th March 2011
L&T Infrastructure Bonds for Tax Saving - Closing 7th March 2011
IDFC Infrastructure Tax Saving Bonds Issue Now Open: See IDFC Infrastructure Bonds: Review, Analysis & Effective Returns Calculations
PFC Infrastructure Bonds: Review - Closing on 22nd March 2011
But my personal opionion at this point in time, when no info is available about the interest rate of return on these bonds, is that based upon your financial situation, one must take a call.
If you dont have any liabilities, like home loans, car loans, etc. and have ample amount of money which you dont want to use, then you can make investments in these Tax Free Infrastructure Bonds solely for tax saving purpose. But keep in mind that inflation usually eats away all your real returns from these kinds of bond investments. Tax saving is there, but only for first year.
However, if you have liabilities like home loan, car loan, or family dependencies requiring money, there is no point in locking your money for a long period of 5 long years. Even if these bonds are offering 10% rate of return, infaltion will eat into your returns by the time you withdraw your money. Better to use this money to repay or pre-pay your loans where your might be paying a lot of interest
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