At eight per cent, returns from infrastructure bonds are decent. But liquidity is an issue.
Last week, Infrastructure Development Finance Company (IDFC) issued a second tranche of these tax-saving bonds. The company has started selling the bond from January 17, with February 4 as the last day.
In the last Union Budget, the government allowed taxpayers an additional deduction of Rs 20,000 if they invested in these bonds. There is a special section — 80CCF — that the ministry of finance has added to the Income Tax Act for the same. The deduction is in addition to the one available under Section 80C.
“Those in the highest tax bracket give little importance to a sum of Rs 20,000. They hardly think beyond home loans, equity-linked saving schemes, insurance and the Public Provident Fund (PPF). Those in the lowest tax bracket usually don’t get to fulfil their Section 80C investments,” says Jain.
| A SAFE BET POST-TAX RETURNS ON INFRASTRUCTURE BONDS | |||
| Tax Slab (%) | 10 | 20 | 30 |
| Investment (Rs ) | 20,000 | 20,000 | 20,000 |
| Tax saved# (Rs ) | 2,060 | 4,180 | 6,180 |
| Initial investment amount after tax savings (Rs) | 17,940 | 15,820 | 13,820 |
| Pre tax interest earned after tax deduction (%)* | 8.91 | 10.11 | 11.58 |
| Post tax interest earned after deduction (%)* | 8.00 | 8.03 | 8.00 |
| *Interest calculated at 8.00% #After including surcharge and cess, tax payable for the highest tax bracket is 30.90%, 20.60% for middle tax slab and and 10.30% for the lowest tax slab | |||
An investor can either opt for an annual payout of interest or take the entire money (including interest) on maturity. These bonds allow deduction during the year of investments. However, the gains will be added to the income and taxed, according to the slab.
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An investor in IDFC’s bonds can buy each bond for Rs 5,000 and get an annual return of eight per cent. Although the bonds mature after 10 years, investors can sell the bond once they list on the National Stock Exchange after the mandatory five-year lock-in period. However, whether they will get an easy exit route or not is questionable.
If you are in the highest tax bracket, you pay a tax of 30.9 per cent (including surcharge and cess). If you invest Rs 20,000 in these bonds, you will immediately save a tax of Rs 6,180. Your net investment is, therefore, only Rs 13,820.
In the first year, you will get an interest of Rs 1,600. It is a pre-tax return of 11.58 per cent on an investment of Rs 13,820. Post-tax, the returns work out to be Rs 1105.6, or around eight per cent.
Highest income tax payers across age groups can look at this product. Senior citizens, in the highest tax bracket, can opt for an annual payout.
If you are in the tax bracket of 20.6 per cent and investing the maximum amount allowed, the investments made are actually Rs 15,820. In this case, the pre-tax returns work out to be 10.11 per cent. The post-tax returns work out to be 8.03 per cent, or Rs 1,270.3.
Financial planners say taxpayers in the 20 per cent tax bracket should consider investing in these bonds, once they have exhausted the Section 80C limit.
Tax payers in the lowest tax bracket too make eight per cent by investing in these bonds. After the deductions, the actual amount invested for people in this slab works out to be Rs 17,940 and the post-tax gains are Rs 1,435.2. However, other instruments such as PPF should be exhausted first because the returns are not taxed.
If you want liquidity, you can also look at fixed deposit of eight years and above, which qualify for similar deductions under Section 80C. State Bank of India, for example, is currently offering an 8.75 per cent interest rate on fixed deposits of over eight years. If you are a senior citizen, the bank offers an interest rate of 9.25 per cent for fixed deposits of a tenure of eight years and above. You can look at these fixed deposits after exhausting the limit for the Senior Citizen Savings Scheme, which offers nine per cent returns.