Infrastructure bonds are the talk of the town. Most taxpayers are happy that they have one more avenue to save taxes from this year. Till last year, they could invest only Rs 1 lakh and save tax of Rs 30,900 if they were in the highest tax bracket under Section 80C of the Income Tax Act. However, from this year, investors can invest an additional Rs 20,000 in infrastructure bonds under Section 80CCF.
In effect, people in the highest tax bracket (30.9%) can now save an additional Rs 6,180 from this year.
“From 2010-11, the finance minister has created a win-win situation both for infrastructure financiers as well as investors”, says Anil Chopra, Group CEO, Bajaj Capital. “Investors can invest an additional Rs 20,000 in infrastructure bonds under Section 80CCF, while infrastructure finance companies can raise funds for five years and 10 years through this process, which can be used to fund long-term infrastructure projects across various sectors.”
Rewind Mode:
Infrastructure bonds are not new to Indian investors. These bonds existed till 2005, when Section 88 of the Income Tax Act, 1961 was in force. “Infrastructure bonds were offered by financial institutions such as ICICI and IDBI, and had a lock-in period of three years,” says Chopra. Investors could invest Rs 1 lakh under Section 88 in those days, but it was structured differently. You could invest Rs 30,000 in infrastructure bonds and Rs 70,000 in other tax-saving instruments like equity-linked saving schemes (ELSS), Public Provident Fund (PPF) and National Savings Certificates (NSC) to claim tax benefit. Alternatively, you also had the option to invest the entire Rs 1 lakh in infrastructure bonds. However, Section 88 was done away in the budget for 2005-06 and Section 80C was introduced.
Under the new section, an investor could claim deduction up to Rs 1 lakh by investing in any of the instruments. However, somehow infrastructure bonds did not figure in the list. Realising the increasing focus on infrastructure, the finance minister introduced infrastructure under Section 80CCF in his last budget.
Offers Galore:
IFCI, IDFC and L&T Infra have been some of the first to offer the new breed of bonds. Power Finance Corporation (PFC) and Life Insurance Corporation (LIC) are expected to join the list soon. IFCI was a private placement issue and mopped up Rs 50 crore, according to distributors. IDFC Infrastructure Bonds was the first public offering that closed on October 22. Larsen & Toubro Infra issue is open to subscription till November 2. Essentially, non-banking finance companies, classified as infrastructure finance companies by the Reserve Bank of India (RBI), can issue these bonds. Though IDFC’s first issue has closed for subscription, the institution has indicated that it may raise as much as Rs 3,400 crore through the issue of bonds during this financial year. It is likely that IDFC could come up with at least a couple of more offerings before the end of the financial year.
Waiting For More:
However, according to experts, investors seem to be waiting for more issues before the financial year-end. “With bond issues of SBI and mega IPO of Coal India, investors were short of cash and a lot of them decided to invest in the latter half of the financial year,” says Anup Bhaiya, MD, Money Honey Financial Services, a Mumbai-based financial products distributor. The interest offered by these bonds could be another reason for the low participation. The IDFC and L&T Infra issues offered 7.5-8.0%, varying marginally on account of buyback and listing options.
“The interest rates offered by these bonds are linked to the 10-year government of India bond, and cannot exceed that,” says Vishal Dhawan, a Mumbai-based certified financial planner. Currently, the 10-year government bonds is close to 8% and the interest rate offered by L&T Infra issue, currently open, is between 7.5% and 7.75%, depending on the options you choose
