Earlier this year, the Finance Minister made available an additional deduction of Rs. 20,000 under Section 80CCF. This deduction was made available for this year over and above the Rs. 100,000 deduction allowed under Section 80C. Under Section 80C an individual is allowed a tax exemption of Rs. 100,000 for investing in specified instruments that include insurance policies, ELSS funds, Provident Funds, Public Provident Funds etc. While some of these exemptions are slated to undergo a change with the New Tax Code being implemented in the next financial year, the current year tax exemptions allow for a Rs. 100,000 under Section 80C. It is in addition to this limit that a Rs. 20,000 exemption is allowed this year for investments in Infrastructure bonds under Section 80CCF.
Who can avail of this additional exemption under Section 80CCF?
As per the applicable Section 80CCF, any individual or HUF can invest in these bonds to avail a tax exemption up to a maximum of Rs. 20,000 in the current financial year. For a taxpayer in the highest tax bracket of 30%, such an investment can result in tax savings of approximately Rs. 6,000.
Which companies qualify as issuers of infrastructure bonds under Section 80CCF?
The tax exemption will be available for investments in infrastructure bonds issued by institutions such as LIC, IDFC, IFCI and others as notified by the Reserve Bank of India as being non-banking finance companies operating in the infrastructure sector.
How does an investment in these bonds work?
These bonds are available for a minimum tenure of 10 years with a lock-in period of 5 years. This basically means that you cannot exit from the bonds for a period of 5 years. At the end of 5 years, investors will typically have an option to avail a buy-back by the issuer, trading it in the secondary market or take a loan by pledging the bonds with specified banks. The interest rates available on these bonds will vary from issuer to issuer and investors can typically opt to either receive interest annually or on a cumulative basis at the end of the holding period.
From a taxation perspective, while the investment in these bonds will allow you to avail of a tax exemption up to a maximum of Rs. 20,000, the interest paid on these bonds is taxable in the hands of the investor. The onus to declare such income and pay applicable tax on it will be on the investor.
How can I apply for these bonds?
While a few issues of these bonds have already been launched and closed in the last couple of months such as those of IDFC and L&T, a few more companies such as Rural Electrification Corporation (REC), Power Finance Corporation (PFC) and India Infrastructure Finance Company (IIFCL) are expected to come out with new issues closer to December to cash in on the tax related investments being made in the last quarter before the financial year closes.
To invest in these bonds, one needs to have a PAN card and a DEMAT account.
Should I invest in infrastructure bonds?
Typically these bonds offer between 7.50%-7.95% per annum. The decision to whether or not to invest in these bonds should be taken keeping in mind the tax savings that you will make by these investments and comparing these against the tax payable on the interest earned and the opportunity loss of not having invested in any other alternate investment options which could give you higher returns. span>