Should you buy Infrastructure Bonds?

This question is echoed by many investors. Infrastructure bonds are certainly not new to the Indian taxpayer. They did exist till 2005 when Section 88 of the Income Tax Act was in force. In the last Budget, these bonds were re-introduced under Section 80CCF.

However, there seems to be a mis-conception in your thinking. These bonds do not compete with equity linked savings schemes (ELSS). Tax saving funds fall under Section 80C of the Income Tax Act. Under this section, tax payers get a tax deduction up to Rs1 lakh. These infrastructure bonds will give you an additional tax deduction of Rs20,000, over and above the Rs1 lakh that you are eligible for under Section 80C. In effect, a total tax deduction up to Rs1.2 lakh on your income. So the first thing you must make note of is that you should consider these bonds only if you have exhausted all the limits under Section 80C.

Let’s look at the tax aspect. Do pay attention to the fact that the income earned from these bonds will be added to your taxable income in the year in which you realise it. It is not an EEE (exempt-exempt-exempt) proposition like the Public Provident Fund (PPF). Just like other tax saving instruments like National Savings Certificate (NSC) and 5-year bank fixed deposits, the interest earned is taxed. Under an Equity Linked Savings Scheme (ELSS), long term capital gains tax is nil and dividends are tax free, so there is no tax burden. Neither is there one in the case of PPF. All these options fall under Section 80C, the infrastructure bonds being outside the purview of this section.

There is also the liquidity aspect. These bonds come with a long tenure of 10 years and a lock-in of 5 years. If there is no convenient secondary market, then you will effectively have a lock-in of 10 years. Although some issuers will provide a guaranteed buyback, ensure that you do not need the money for a minimum 5 years.

Unlike other tax saving investments like NSC or PPF, these bonds don’t carry any implicit or explicit government backing. Combined with the tenure of these bonds, it will mean that the continued creditworthiness of the bond issuers is something that investors will have to keep an eye on. Agreed, IFCI, PFC, IDFC and L&T Infrastructure are sound companies, but we are taking a view over a decade here.

Only after you look at these aspects should you make a decision on whether or not to invest in the bonds. A tax-saving investment has to be an investment first and a tax saver later, in the sense that if you wouldn’t be investing in that asset otherwise, then you shouldn’t do so just because it’s saving some tax. Moreover, the upper limit of Rs20,000 means that many taxpayers in the upper tax bracket will find the quantum of additional tax savings to be marginal.

source: valueresearchonline.com