During our childhood, we might have wondered as to why earning people get very active between March and July and we begin to understand the reason only after we get step in their shoes by receiving the first Form-16 of our life.
Come February, the worry of the income-tax planning kicks in and you can breathe easy only after you file your return of income in July.
Though there is no escape from paying taxes, you can claim consolation prizes (benefits), which the Union Budget 2010-11 offered to the investor community in form of Infrastructure Bond Investment. The tax deduction for infrastructure bonds was available for retail investors till 2005-06, which was then phased out and reintroduced in 2010-11.
For most of us, tax planning is synonymous to confusion. So let’s try to understand how infrastructure bonds can help you to save a little on your net income-tax payment.
What are tax-saving Infra Bonds?
Infrastructure bonds are issued by government or non-government institutions to fund crucial projects related to roads, power, ports, airports and other public facilities. These developments are of immense importance from countries economic growth perspective. As tax advantages are associated with these bonds funding is available at lower interest rates.
Why should you invest in infra bonds?
You can invest in infrastructure bonds, if you want to save on tax by claiming a tax deduction, which over and above `1 lakh under Section 80C. The investment in infrastructure bonds will make you eligible to claim an addition deduction of `20,000 from your net income under Section 80CCF.
how much income-tax you can save?
Even though there is no limit on the amount that you want to invest in infrastructure bonds, you will get only a one-time tax benefit for `20,000 at the time of investment. So even if you invest more than `20,000 in infra bonds, you won’t get any additional tax benefits and it would lock your investments for the next five years.
What are the options?
Currently, you have options — IDFC Long Term Infrastructure Bond and L&T Infrastructure Bond. Both these bonds are open and both are almost similar. Both are offering an interest rate of nine per cent per annum. The terms of the two issues are very similar except that IDFC bonds enjoy AAA rating whereas L&T Infrastructure Finance’s bonds are rated AA+. While the bond issue of state-owned IDFC would close on December 16, L&T Infrastructure’s issue would close on December 24.
how best is this investment option?
As the interest income of Infrastructure bonds is taxable, the effective return on this investment generally ranges from five to eight per cent, which might be slightly lower than the return on other safer investment options like PPF, NSC, fixed deposit. Although infra bonds offer you safety, they don’t protect you from inflation and is highly illiquid till the five-year lock-in period is over. As the interest, which you earn on the infra bonds, is not tax-free, it could be judicious to use this option only for tax-saving purposes and restrict the maximum investment to `20,000.
How to choose the right one?
Look at two factors when you decide to buy infra bonds — rating and interest rate.
Find out the rating assigned to the bond by rating agencies such as CARE, CRISIL, ICRA, or Fitch India. Credit rating by these agencies measures the credibility and financial stability of the company to pay its obligation. If everything is constant, a higher rating bond should be more preferable.
The interest rate is the return that you will receive every year from the bond. A higher return is good for you.
(The writer is the CEO of bankbazaar.com)