Govt waives 3-year lock-in period on investments made by non-residents in IDF bonds

The government has waived the three-year lock-in period on investments made by non-residents in infrastructure debt funds (IDFs), to promote funding in the infrastructure sector.

A notification in this regard has been issued by the Central Board of Direct Taxes (CBDT).

With an aim to accelerate and enhance flow of long-term debt in infrastructure projects, amendments in the tax laws were made to provide exemption from income tax to infrastructure debt funds (IDFs) in 2011.

To attract off-shore investments into IDFs, any amount of interest received by non-resident or foreign company from investment in such IDFs is charged at a reduced tax rate of 5 per cent, said Taxmann Deputy General Manager Naveen Wadhwa.

IDFs are investment vehicles to accelerate the flow of long-term debt to the sector.

Wadhwa said if a non-resident transfers rupee-denominated bonds of IDF to another non-resident outside India, such transfer is not regarded as transfer for the purpose of capital gain, and no capital gain tax is charged on such transfer.

However, all these benefits are available only when IDF is set up as per the prescribed guidelines and fulfil required conditions.

One of such conditions was that the investment made by a non-resident in bonds should be subject to a lock-in period of three years except where transfer is made to another non-resident.

"In order to further boost the foreign investment in the infrastructure sector, the government has decided to remove the said lock-in period. Thus, non-resident investors would now be able to freely transfer the bonds of IDFs," Wadhwa said.

Leena Chacko, partner at Cyril Amarchand Mangaldas, said the CBDT's decision will make investments in bonds issued by IDF more attractive for offshore investors.

Earlier this month, the government has set out a plan to invest Rs 100 lakh crore in the infrastructure sector by 2024-25.

A task force headed by the economic affairs secretary has been set up to identify infrastructure projects for the investment.

The challenge is to step up annual infrastructure investment so that lack of infra does not become a binding constraint on the growth of the Indian economy, the finance ministry had said while constituting the task force.