Tax saving infrastructure bonds are a good option in the fixed income category. These are issued by infrastructure companies approved by the government and also they offer a decent rate of interest plus tax benefits.
What is infrastructure?
Infrastructure is nothing but the fundamental benefits for the economy to function effectively. It is the basic facilities and systems that serve a country or city. Examples include roads, bridges, tunnels, water supply and so on.
What are infrastructure bonds?
Infrastructure bonds are provided for the sake of funding infrastructure projects like road construction, water supply improvement, and power generation projects. Such bonds provide tax benefit as the government promotes infrastructure development and investments through these bonds. Tax is also exempted.
Infrastructure bonds are given by infrastructure companies with government approval. The maximum amount an investor can invest in infrastructure bonds is up to Rs 20,000.
Who issues Infrastructure bonds and what’s their purpose?
Non-banking financial companies and institutions generally issue Infrastructure bonds. Infrastructure bonds are long-term bonds that invest in infrastructure projects of the government. The companies that issue these bonds are intermediaries as they borrow from investors and lend/invest it in long-term gestation projects. The maturity period is 10 to 15 years.
The lock-in period is usually 5 to 7 years and the issuer can apply the buyback option after the lock-in period.
What are the features of Infrastructure Bonds?
Some features of infrastructure bonds are:-
- Available only for Resident Indians.
- NRIs aren’t eligible for investing here.
- Tax Deducted at Source doesn’t apply on these bonds.
- You can pledge these bonds for availing loans after the five-year lock-in period of infrastructure bond expires.
Why should you invest?
You can invest from a tax planning perspective because you receive an extra exemption of Rs 20,000. Ministry Of Finance has added Section 80CCF to the Income Tax Department. Taxpayers can think of investing in these bonds only after they have crossed the Section 80C limit of Rs 1 Lakh.
Who can all hold accounts in Infrastructure Bonds?
A resident Indian of 18 and above, who is a resident Indian can invest in these bonds. A single account can be opened. A joint account can also be opened. Joint families can also open accounts in these bonds.
Merits of Infrastructure bonds
- Protection of capital
When an investor invests money in Infrastructure bonds, his/her money is well protected.
- Tax benefits
If your investments are up to Rs 20,000 you’re eligible for Income Tax deduction under Section 80CCF of the Income Tax Act.
- Lesser risk
Issuing companies have high credit ratings hence there is lesser risk involved.
Documents to carry
PAN Card and Demat account number
In the absence of a Demat account, you can hold the form physically
Passport and Voter Id card
Demerits of Infrastructure bonds
Need not necessarily be liquid
There are Tax-Free bonds but they might not be liquid. The quality traded is less many times. You can’t buy or sell in large quantities easily.
Interest rates can rise
It is a huge interest rate risk because you invest in tax-free bonds at a fixed interest rate. Bond prices will fall in case of an increase in increasing rates.
Tenure can vary from 10 years to 15 years to even 20 years! This is too long.
This will work for you if you fall into the higher tax bracket. However its better to check your risk tolerance and financial goals prior to making decisions.
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