Tax breaks likely for infrastructure bonds in Budget

Iinterest income on such bonds is liable to tax deducted at source.

Interest income from investments in infrastructure bonds for sectors like power and roads among others may be exempted from income tax.

Under Section 193 of the Income Tax Act, interest income on such bonds is liable to tax deducted at source.

This tax is an irritant for many infrastructure bond issuers and investors, as it is levied at up to 20 per cent on such income and reduces the attractiveness of such long-tenure securities for investors.

"Interest income from infrastructure securities in certain sector like power and roads may be exempted from income tax," a Finance Ministry official said. An announcement in this regard is likely in Budget 2008-09.

The fiscal costs for giving the incentive will be very negligible compared to the potential benefits, according to a tax consultant.

There has been long-standing demand from various stake-holders and even the Deepak Parekh Committee had recommended for such a fiscal incentive to bonds issued for power sector to attract risk capital.

It is estimated that infrastructure development requires about $ 500 billion in 2007-2012. The power sector alone requires about Rs 10, 63,700 crore in the next five years, according to the Power Ministry. Similarly, road sector requires Rs 3, 11,816 crore during the period.

In fact, the Power Ministry had recommended granting income tax exemptions for individual investments up to Rs 50,000 in power infrastructure bonds in the coming budget.

Under Section 193 of the Income Tax Act, the government had earlier given income tax exemption to interest income from National Defense bonds, National development bonds, 7-year National Saving Certificates, Gold Bonds and National Development Bonds.

BREATHING SPACE

Under Section 193 of the Income Tax Act, interest income on such bonds is liable to tax deducted at source

This tax is an irritant for many infra bond issuers and investors, as it is levied at up to 20 per cent on such income