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Extended Tax Benefit - Investing in Infrastructure Bonds



Who will Issue Infrastructure Bonds?

The bonds will be issued by;

  • Life Insurance Corporation of India
  • Industrial Finance Corporation of India
  • Infrastructure Development Finance Company
  • Non-banking finance companies classified as infrastructure finance companies by the RBI.

Features of Infrastructure Bonds - Projected

The features of infrastructure bond will be similar to the infrastructure bond offered in earlier years;

  • Minimum tenure - 10 years
  • Lock-in or Maturity Period – 3 years to 5 years
  • Nature of Return – Guaranteed interest rate like fixed deposit
  • Interest Rate – Range of 6% - 8% per year
  • Interest Payment – Interest payment will be either yearly or at end of maturity period
  • Tax Treatment of Interest – investments up to 20,000 will be exempted from tax.
  • Tax Treatment of Interest – Interest earned will be subjected to tax.

Why should you invest in Infrastructure Bonds……???

There are many reasons that make you to invest in Infrastructure Bonds. Some of them are given below.

  • Savings
  • Tax Saving
  • Assured Return
  • Reasonable Interest Rate

Saving

Investment up to Rs 20,000 in infrastructure bonds will help you to save Rs 20,000 for future use.

Tax Saving

Investments up to Rs 20,000 in infrastructure bond will save tax of Rs 6180 (including education cess) in the highest tax bracket of 30%

Assured Return

Investments made in infrastructure bonds guarantees you an assured Rate of return. though low, is guaranteed. It will help you to ensure that you will not loose your peace of mind on infrastructure bond investments.

Resonable Interest Rate

Infrastructure Bonds offer Interest Rate of 6% - 8% per annum. While comparing with Fixed Deposits infrastructure bonds are better option to compete with inflation plus it

Tax Saving Under Infrastructure Bonds

In this section we are going to discuss about the Tax implications on Infrastructure Bonds. Let’s look at the pros and cons of investing in infrastructure bonds for the sake of tax-saving. The analysis will be from the perspective of the different 'tax groups' (As per Budget 2010).

Tax groups

Tax Group Taxable Income Tax rate
1 Rs. 160000 - Rs. 500000 10%
2 Rs. 500000 - Rs. 800000 20%
3 Above Rs.800000 30%

To understand the pros and cons of any tax-saving investment, we need to look at four major parameters such as :

Parameter 1: Actual tax-saving
Parameter 2: Returns from the investment
Parameter 3: Opportunity cost
Parameter 4: Effect of Inflation on the returns on investment

Assumptions

1) Let's assume the rate of return on infrastructure bonds = 6.5% per annum.
2) Let's consider the overall rate of inflation at 8%.

Tax Group 1: People with an income of Rs. 160000 - Rs. 500000
Tax Group 2: People with an income of Rs. 500000 - Rs. 800000
Tax Group 3: People with an income Above Rs.800000

Tax Group 1: People with an income of Rs. 160000 - Rs. 500000

Parameter 1: Actual tax-saving is 10% of Rs 20,000 = Rs 2,000 (if you invest Rs 20,000 in the instrument you get to reduce your taxable income by Rs 20,000 thus giving a 10% benefit).

Parameter 2: What will be the returns at the end of the lock-in period? For a lock-in period of 3 years an investment of Rs 20,000 would fetch an income of Rs 4159. When added to the tax saved we get an effective return of Rs 26,159 (Rs 20,000 + Rs 4,159 + Rs 2,000) on our investment.

Parameter 3: If this same amount were to be invested in a market instrument that fetched a return of 15% (which is very reasonable considering that the benchmark Sensex and many mutual funds have given comparatively higher returns over a long period), the investment would fetch an effective return of Rs 27,376 (Rs 20,000 - Rs 2000 = Rs 18,000 invested @15% per annum for 3 years).

Parameter 4: What would be the minimum amount required to counter inflation at 8%? The amount would be Rs 25,194.

Returns Analysis

Returns required to counter inflation Returns from Infrastructure bonds (A) Returns from market instrument (B) Surplus (A-B)
25,194 26,159 27,376 -1217

Tax Group 2: People with an income of Rs. 500000 - Rs. 800000

Parameter 1: Actual tax-saving is 20% of Rs 20,000 = Rs 2,000 (if you invest Rs 20,000 in the instrument you get to reduce your taxable income by Rs 20,000 thus giving a 20 per cent benefit).

Parameter 2: What will be the returns at the end of the lock-in period? For a lock-in period of 3 years an investment of Rs 20,000 would fetch an income of Rs 4159. When added to the tax saved we get an effective return of Rs 28159 (Rs 20,000 + Rs 4,159 + Rs 4,000) on our investment.

Parameter 3: If this same amount were to be invested in a market instrument that fetched a return of 15%, the investment would fetch an effective return of Rs 27,376 (Rs 20,000 - Rs 2000 = Rs 18,000 invested @15% per annum for 3 years).

Parameter 4: What would be the minimum amount required to counter inflation at 8%? The amount would be Rs 25,194.

Returns Analysis

Returns required to counter inflation Returns from Infrastructure bonds (A) Returns from market instrument (B) Surplus (A-B)
25,194 28159 27,376 783

Tax Group 3: People with an income Above Rs.800000

Parameter 1: Actual tax-saving is 30% of Rs 20,000 = Rs 6,000 (if you invest Rs 20,000 in the instrument you get to reduce your taxable income by Rs 20,000 thus giving a 30 per cent benefit).

Parameter 2: What will be the returns at the end of the lock-in period? For a lock-in period of 3 years an investment of Rs 20,000 would fetch an income of Rs 4159. When added to the tax saved we get an effective return of Rs 30,159 (Rs 20,000 + Rs 4,159 + Rs 6,000) on our investment.

Parameter 3: If this same amount were to be invested in a market instrument that fetched a return of 15%, the investment would fetch an effective return of Rs 27,376 (Rs 20,000 - Rs 2000 = Rs 18,000 invested @15% per annum for 3 years).

Parameter 4: What would be the minimum amount required to counter inflation at 8%? The amount would be Rs 25,194.

Financial Planning
Tax Planning
Investment Planning