During the last Budget, the government had announced the introduction of infrastructure bonds for saving tax. According to this rule, tax payers can invest up to Rs 20,000 in infrastructure bonds for long term and use this amount as deduction from the taxable income.
The deduction of Rs 20,000 comes under Section 80CCF and is over and above the existing deduction of Rs 1 lakh allowed under Section 80C.
This means if you are in the highest tax bracket paying 30 per cent tax, you can save Rs 6,000 in taxes by buying long term infrastructure bonds. You can invest more than Rs 20,000 in infra bonds, but the deduction will be allowed only up to Rs 20,000. Investment in these bonds should be for long term. Hence the lock in period for these bonds is five years. This means investors cannot liquidate the investment before five years.
Some of the bonds available in the market are mentioned in the table. The two interest rates are for with buyback option and without buyback option. L&T gives two options of buy back, one after five years and another after seven years with varying interest rates as shown in the table.
Features
* Term: This is the period for which the bond is valid. Usually this is 10 years.
* Lock-in period: This is the period till which you cannot redeem the bond. This is usually five years.
* Interest rate: Interest rate is the return you get from the bond.
* Exit option — With or without buyback option: The bond with buyback option pays less interest, and the variant of the same bond without buy back option pays higher interest. For example, REC bond has a variant with buyback option that pays eight per cent and variant without buy back option that pays 8.1 per cent. Both have their own advantages.
Buyback option gives you the safety that your bond will be bought back in future by the company at face value.
In case of bonds without buyback option, you will have to sell it in the open market. The prices of bond in the open market will fluctuate.
* Cumulative and non-cumulative: In the cumulative bond, you are paid the interest after the lock-in period or the expiry period. In case of non-cumulative bond, you get the interest every year.
Benefits
Bonds, compared to stocks and equity related mutual funds, are safe investment. These bonds are issued by companies which have very high credit rating by credit agencies and hence there is almost zero risk of losing money.
Choose right one
An infrastructure bond is an essential tax saving tool and hence if it makes sense for you, you should go for it. Look at the two major factors when deciding upon the bond.
* Rating: Find out the rating assigned to the bond by rating agencies such as CARE, CRISIL, ICRA, or Fitch India. Rating 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.
* Interest rate: The interest rate is the return that you will receive every year from the bond. A higher return is good for you.
Comparison
Long term infrastructure bonds usually gives an interest of eight per cent.
The interest income is taxable and hence the effective return is about five to six per cent. This is certainly lower than any safer investment asset with exemption on interest income such as PPF.
However, if we compare the infrastructure bond with other assets such as fixed deposit, National Savings Certificate or Kisan Vikas Patra, the infrastructure bond fairs equally well.
Moreover, the better way to look at it is to understand that this is a tax saving scheme over and above `1 lakh under Section 80C of the Income-Tax Act.
If you are not averse to locking away `20,000 per year as a long term investment, which however comes with taxable interest, you can opt for it.
(The writer is the CEO of bankbazaar.com)