In Budget 2010-11, besides raising the tax slab, the finance minister provided additional deductions of Rs 20,000 for investments in infrastructure bonds.
These will be in addition to Section 80C of the Income Tax (I-T) Act that allows deductions up to Rs 1 lakh and will come under Section 80CCF of the I-T Act.
Kuldip Kumar, executive director, tax and regulatory services, PricewaterhouseCoopers, said the tax benefit of these bonds would rise with the increase in the income slab. A male in the 10 per cent slab (Rs 1.6-5 lakh) that is applicable from the next financial year can save a maximum of around Rs 2,060. Someone in the 20 per cent (Rs 5-8 lakh) tax slab can save up to Rs 4,000 while someone in the highest tax bracket can save up to Rs 6,180.
The government is yet to notify these bonds. Experts are still awaiting clarity on issues such as the tenure of the product, interest rates and the agencies that can sell it.
This is not the first time that infrastructure bonds have been made available for tax-saving investments. A few years ago, banks that undertook infrastructure development used to issue such bonds. Examples of such bonds are Flexibonds, issued by IDBI Bank, and tax-saving infrastructure bonds issued by ICICI Bank that were popular till 2005. These bonds were eligible for up to Rs 30,000 deduction under Section 80C. Since the government added things like tuition fees and repayment of the housing loan principal under Section 80C, banks had to stop issuing these bonds.
Based on the experience and the Budget announcements, experts say these will be long-term bonds. “They may have a five-year lock-in,” said Vikas Vasal, executive director at KPMG.
On interest rates, experts said most long-term bonds were pegged to prevailing market rates. “As infrastructure bonds were eligible for deduction, the rates were slightly lower than bank fixed deposit rates,” said Gaurav Mashruwala, a certified financial planner. Experts reckon the government will issue these bonds at around 1.5 per cent discount to the fixed deposit rates of similar tenure.
Due to low returns, experts said the current inflation could eat into the gains. They can even be inflation neutral. Another drawback of these bonds is that the interest earned will be taxable as they follow the exempt-exempt-tax structure. On the positive side, these bonds will be AAA-rated government securities. This means the returns are assured and they will have a sovereign guarantee.
Financial planners said before investing in these instruments, one should look at the overall financial goals. Tax planning has to be in conjunction with overall investments. Just because there is another avenue to save tax does not mean investing is necessary.
They suggest one should compare returns with other available instruments of similar tenure. For example, if these bonds have a tenure of more than five years, mutual fund investments can give better returns and prove to be more tax-efficient. Similarly, calculate the next impact of these investments on other available instruments such as a bank fixed deposit and evaluate which yields better results after available deductions.
