Axing of Sec 88 tax rebate hits infrastructure bond mop-up

The discontinuance of tax rebate under Section 88 of the Income Tax Act has dealt a blow to infrastructure bonds. The resource mobilisation plans of Industrial Development Bank of India (IDBI), ICICI Bank and Power Finance Corporation would undergo a change with the changed tax saving regime.

IDBI has already budgeted a 60 per cent cut in fund raising through Flexibonds for 2005-06. It now plans to mobilise Rs 1,000 crore through Flexibonds, down from Rs 2,500 crore in 2004-05, sources said.

The 2005-06 budget introduced a new Section 80C in lieu of deleted Sections 80L, 80CCC, 80CCD, 88, 88C and 88D. Benefits under the deleted sections were in the nature of tax rebate.

Whereas under the new Sections 80C, 80CCC and 80CCD, investments up to Rs 1,00,000 are entitled for deduction from total income for arriving at the taxable income.

Housing loan principal repayment, insurance premium payment, contribution to provident fund and public provident fund, tuition fees will consume the Rs 1,00,000 investment limit for most of the individuals who have been investing in infrastructure bonds.

Thus, there's no incentive left for a large number of investors in infrastructure bonds to invest in IDBI's Flexibonds this year, the sources said.

The situation for ICICI Bank is no different and would be similarly affected when it comes to raising resources through tax-saving bonds.

With the changes made in the 2005-06 budget on tax savings, investments in infrastructure bonds will not really be a need for a large section of tax savers, ICICI sources said. ICICI Bank raised over Rs 2,000 crore in 2004-05.

The Section 80C has done away with sub-limits for certain investments. The erstwhile Section 88 offered tax rebate of 20 per cent for a maximum of Rs 70,000, with sub-ceilings on investments in equity-linked savings schemes, tuition fees and housing loan principal repayment.

To avail of tax rebate on the total limit of Rs 1 lakh, an individual had to invest Rs 30,000 in infrastructure bonds.

The Section 80C introduced now allows a tax saver to invest the entire Rs 1,00,000 in one or several instruments of his/her choice.

An investment advisor, who till IDBI converted into a banking company was selling Flexibonds, said the new section has removed the inducement for investing in infrastructure bonds as a tax saver can now opt for instruments that could offer a much higher return.

Sources said IDBI and ICICI Bank will have to make up for lower mobilisations from infrastructure bonds through increased resources raising through bank deposits.