Interest on Infrastructure Bonds

Taxes | admin | September 26, 2010 at 12:46 am

tax on infrastructure bond The government had, in the Budget, announced that under Section 80CCF, any individual or HUF can invest up to Rs 20,000 in infrastructure bonds issued by certain institutions as notified by RBI. This will be over the Rs 1-lakh deduction allowed under Section 80C.

Hence, an investor who is in the highest tax bracket of 30% can save an additional Rs 6,000 and those in the lower tax bracket can save Rs 2,000 by investing in infrastructure bonds this financial year. Moreover, these bonds offer one the stability of fixed returns and ensure safety of capital.

As per the the specifications of the government, infrastructure bonds are to be issued by LIC, IDFC and IFCI and any non-banking infrastructure finance company recognised by RBI. The bonds will have a maturity of 10 years but a lock-in period of 5 years. The investor can ask the issuer to buy-back his/her bonds after the lock-in period. Alternatively, the investor can choose to trade these bonds in stock exchanges. The investor needs to have a demat account to be able to invest in these instruments and applications. The issuer of the bond will not deduct any TDS and it is the responsibility of the investor to declare the income from these bonds and pay taxes on the interest. IFCI has recently closed its issue of infrastructure bonds and LIC and IDFC will launch their issues in the coming months.

While these bonds allow one to get a tax deduction in the year ending March 31, 2010, any interest income earned on these bonds will be taxable as income from other sources. Investors also have the option of paying interest annually (non-cumulative option) or having the interest compounded annually but paid out at the end of the holding period on a cumulative basis.

There are four options available-non-cumulative buy-back option (7.85% interest rate), cumulative buy-back option (7.85% interest rate), non-cumulative option with buy-back (7.95% interest rate), and cumulative option without buy-back (7.95% interest rate).

Source: Yahoo Finance