Long-term infra bonds offer additional tax relief

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A new section 80CCF under the Income Tax Act
To boost the investment in the infrastructure sector/projects, the Finance Act, 2010, had introduced a new section 80CCF under the Income Tax Act, 1961 (‘the Act’) to provide for an income tax deduction for subscription in long-term infrastructure bonds (‘bonds’), as notified by the central government.

The deduction can be claimed by an individual or a Hindu Undivided Family of up to Rs 20,000 from the taxable income in respect of the amount paid or deposited as subscription for bonds during the FY 2010-11.

Long-term Infrastructure Bonds
The central government has now notified that the bonds issued by Industrial Finance Corporation of India, the Life Insurance Corporation of India, Infrastructure Development Finance Company and a non-banking finance company classified as an infrastructure finance company by the Reserve Bank of India (RBI) would qualify as long-term infrastructure bonds.

These bonds will be eligible for the purpose of claiming a deduction u/s 80CCF of the Act.

Tax savings
An individual or a HUF can claim a deduction of up to Rs 20,000 from the taxable income by subscribing to these bonds.

It effectively means that for the taxpayer who is in the highest tax bracket of 30%, he will be able to save tax up to Rs 6,180, including applicable education cess, annually and in lowest tax bracket of 10%, he will be able to save tax up to Rs 2,060.

Additional Deduction
The deduction of Rs 20,000 in respect of subscription to the bonds is in addition to the overall deduction of Rs 1 lakh available under other provisions for claiming tax deductions.

These include Section 80C wherein deduction can be claimed in respect of life insurance premium, contribution to recognised provident fund/public provident fund, repayment of principal amount of housing loan, etc.

Section 80CCC deduction is in respect of contribution to certain pension funds and Section 80CCD deduction in respect of contribution to pension scheme of the central government.

Lock-in period
The tenure of the bonds will be a minimum 10 years with a lock-in period of five years for an investor. After the lock-in period, the investor may exit either through the secondary market or through a buyback facility as specified by the issuer in the issue document.

The bonds can also be pledged for obtaining loans from specified banks after the lock-in period. Furthermore, it is mandatory for the subscriber to furnish his PAN to the issuer of the bonds.

Yield of the bond
The final details in respect of the interest and other terms and conditions are to be prescribed by the issuer of the respective bonds.

However, it is important to note that it has been specified by the government that the yield of the bond shall not exceed the yield of government securities of corresponding residual maturity as reported by the Fixed Income Money Market and Derivatives Association of India as on the last working day of the month immediately preceding the month of the issue of the bond.

End use of the funds
The proceeds from these bonds shall be utilised by the issuer towards infrastructure lending as specified by the Reserve Bank of India.

Furthermore, the issuer of these bonds is required to submit necessary details to the government/regulatory authority in respect of the end use of these funds.

The Conclusion
These long-term infrastructure bonds offer an additional window for making tax saving investments of up to Rs 20,000.

However, there is a long gestation period with a minimum five year lock-in and also that tax savings are not substantial due to the overall limit for claiming the tax deduction.

Nevertheless, any tax-saving investment tool is always welcomed by the common tax payer!