Infrastructure bonds: Some caveats

The budget this year was a low-key affair, at least from the political arena, it is just the petrol prices that is causing some stir. So apart from the tax slab changes, that brings more money into pockets of salaried employees, there is additional tax saving investment avenue that is proposed in this year’s budget i.e. infrastructure bonds.

What is announced?
The government has allowed a deduction of up to Rs 20,000 on investments in long-term infrastructure bonds. The deduction is in addition to the Rs 1 lakh allowed under Section 80C of the Income Tax Act.

What are infrastructure bonds?
These are bonds issued by government and the fund collected is utilized to bolster the infrastructure projects


What is the income tax section under which deduction can be claimed?
The investment of upto Rs 20,000 can be claimed under section 80CCF.

How much can I save?
Not much and here is the caveat, the maximum investment that can be claimed for deduction is Rs 20,000 and if you fall in the maximum tax bracket of 30%, then the maximum you can save is just Rs 6,180 in a year.

Is this a new great thing done by the Finance Minister?
Not really, the tax deduction for investment in infrastructure bonds was available till 2005 under section 88 (but within the limit of 1 Lakh), but 2005 budget scrapped individual investment limits and created section 80C where you can invest in any tax-saving avenue in any proportion. The only new thing here is that now, the investment in infrastructure bonds is in addition to the section 80C exemption.

Why it is added back with such a small limit?
Well, here is another caveat. The infrastructure bonds are a low-risk investment and hence does not yield very high returns (7-8%). So with stock market showing master-blaster performance, most people started investing in equity linked saving schemes and the investment dwindled in the infrastructure bonds. This step is probably to bring back the interest in these bonds.

What are the other caveats?
1) It is still not clear if the private companies will be allowed to issue these infrastructure bonds.
2) The budget mentions that only “long-term” investment in infrastructure bonds quality for tax-break, but fails to define the “long-term”
3) The interest earned from these bonds is not tax-free (the older section 80L, which provided such tax-free interest had already been scrapped earlier)
4) The interest earned from these bonds may not be anywhere spectacular, due to it being a less-risky investment.

What do you suggest?
So, it may not be prudent to invest Rs 20,000 for “long-term”, which provides you a return of mere 7-8% interest rate (with taxable interests) with providing just a meager tax-saving of Rs 6180 per year. I would suggest a wait and watch policy, till the clouds get cleared on this new announcement. Since anyway the investments will only qualify from next-year onwards.