Jagoinvestor
August 5, 2010
Tax Deductions from Infrastructure Bonds under 80C
Finally govt gave clarity about the Infrastructure bonds under sec 80C where you can invest upto Rs 20,000 for additional tax deduction apart from the current Rs 1 lac. Look more on Income tax slab .
Who can issue those Infrastructure Bonds ?
- Life Insurance Corporation of India
- Industrial Finance Corporation of India
- Infrastructure Development Finance Company
- Any non-banking finance company classified as an infrastructure finance company by the RBI also qualifies, for example : L&T Infrastructure Finance
Other Features
- Lock in period of 5 yrs
- Mandatory to furnish PAN (Permanent account number)
- Minimum Maturity period of 10 yrs (you can get out of those after 5 yrs if you wish, but not before that)
Read about changes in Direct Tax Code which will not have these Infrastructure bonds
Where will this money be invested ?
The money invested in these Infrastructure Bonds will be invested in building of Airports, power plants, roads and ports, which is mainly to meet the infrastructure need of the country. This is a good move, where people can invest money for tax saving and even govt can raise funds to improve the infrastructure of our country.
How to exit from the Funds after 5 yrs ?
It depends. If the bonds are traded on stock exchange, then you can sell them after 5 yrs on exchange or go for manual redemption from the issuer (filling form for exit etc.)
Yield/Returns of the Bond
This detail will actually differ from issuer to issuer and has to come from them , but government has notified that the yields from these bonds will not exceed the yield of govt securities of similar residual maturity bonds, as reported by the Fixed Income Money Market and Derivatives Association of India (FIMMDA) .
Who should Invest ?
As the returns from these Infrastructure bonds are not exciting, you should only invest if your risk appetite is very low and security is your top most concern apart from tax saving being one of the reason . If you are looking at growth of your investments , better invest in equity oriented products even if they are not tax saving products.
Note : Even after the govt have clarified about the bonds , they are yet to be issued by the respective companies , I think they would launch them at the end of year when most of the people are hunting for tax saving products .Look at this video where IDBI executive is talking about about Infrastructure bond.
Question : Are you going to invest in these Infrastructure bonds ? Yes/No ? Why ?
Manish,
Since I belong to 30% IT bracket, I have invested INR 20,000/- this year into REC infra bond! Opted for 15 years term with annual cumulative option. Interest rate looks decent to me at 9.15%. A saving of around INR 6,000/- in income tax effectively brings down my investment to around INR 14,000/-! (That is pretty good!)
I though, am not sure about how do I need to pay Income Tax on the interest that I would earn on this investment.
Should I pay Income Tax on the notional interest from next year onward or should I pay Income Tax on the interest at the end of 15 years when I receive the interest on my investment?
Kaushik
The better place to ask this is http://jagoinvestor.dev.diginnovators.site/forum/
Hi Manish
There are two issues presently from IDFC and IFCI. Which of the two is better from investment point of view? There is a difference of .4% in interest. Pls suggest.
Kajal
The returns offered are totally dependent on companies .. you invest in the one you trust
Manish
can someone tell me how long does it take for infrastructure bonds to be alloted to you after you have ordered them? when I check status online, it shows ordered but does not show alloted. it has been more than 3 months now.
Mukul
Its suppose to be there in 30 days , but if its not there till now , you should investigate with company now , try their customer care
Manish
Okk i was calculating the return on this.
As it have a 5 year lock in.Plus the amount ranges 20k on which risk can be taken.
Now i was comparing various options like.Investing in infra funds with comparing the same being invested in elss(in sense of above the 1 lakh limit and not asking for tax deduction on same) or invest same amount in banking fund growth option like reliance or hdfc top 200.
In infra bonds for 10% tax bracket people cagr is around 9.11 and that too after 5 years.
SO why not pay 2k tax and invest remaining 18k in this riskier option .One can always take his money back in non elss options when he sees his return grow more than 5 year return of infra fund.Also seing past return and wont that be a bad investment ploy?
In the sense cagr is 9.11% in infra funds.
Whereas this 2 funds gave returns at more than 12% cagr .Infact more than 20% cagr upto 24-26%.
Sohil
Paying tax and using 18k to invest in something else is the “BEST” option . This is what I am going to write a post on soon ..
You have got the point very clear !
Manish
No, I won’t invest in such bonds.
I would rather pay tax ( the tax amount that will be saved after investing in the bond) to government as it will negligible amount.
The effective returns from these bonds after a period of 5 – 10 years are not significant.
And instead invest that 20000 in good diversified MF or shares for 2-3 years where the returns would definitely be far better.
Valuable!!!! Thanks!
These seem like a good tax-saving scheme, but I do not want to lockin my capital for 5 years as we might be needing money for a house before that.
My question is: Can we take loan against these instruments i) before 5 years? ii) after 5 years?
AS
AS
Its only available after lock in period of 5 yrs
Manish
HI MANISH, THX FOR ALL THE INFO ON UR SITE, IT MAKES INVESTING MUCH SIMPLER.
MY QUERY IS AS FOLLOWS:
THE PROFIT I BOOK FROM EQUITIES OR MF SALE NEEDS TO BE REINVESTED IN A SAFE INSTRUMENT . I do not want to reinvest profits in equity market, but in a instrument where my capital is assured ?
WHAT OPTIONS DO U SUGGEST ?
Vikram
You can look at debt options like FD’s , debt mutual funds , PPF .
Manish
Manish i read an article which says this as an excellent opprtunity for people under top tax bracket
Here it is please add details in your article taking information from it
Sohil
No , there are 2 things which I didnt agree or should I say like it
1) They are stressing on returns before tax and also consider tax saved into returns and hence say that “its earning 13.something return” , What the hell i have to do with pre-tax returns . At the end i have to see what are post tax return and from that front its not more than 6% (approx) .
2) They are suggesting it for long term ,which is against the best practice of investing in equity for long term . may be some very conservative investors should invest in these , but for younger generation , its not a good fit .
Manish
India has emerged as one of the prime investment destinations of the world in recent years. With private equity players considering big investments, banks giving loans to builders and financial institutions floating real estate funds one can see that the real estate sector in India is attracting huge investments. The total investments going into the Indian real estate market could be seen hitting $ 1.5 billion in the next fiscal. The new FDI policy is expected to allow up to 100 per cent investment under the automatic route in townships, housing, built-up infrastructure and construction-development projects such as hotels, resorts, hospitals, educational institutions, housing and commercial premises. The Indian Government has also reduced the minimum mandatory area to allow FDI in real estate sector from 100 to 25 acres. Hence, with such huge investment buzz and high income growth, Indian real estate sector is all set to flare up. This $ 48 billion industry that is expected to grow at a CAGR of 21 per cent in the next five years.
Real estate companies with large presence in metros, better access to capital and the ability to structure and execute projects will be the leaders. Industry deregulation, improving demographics and continuous urbanisation accompanied with stronger IT/BPO industry growth would be the primary drivers. Major international investors such as US-based Warburg Pincus, Blackstone Group, Broadstreet, Morgan Stanley Real Estate Fund (MSREF), Columbia Endowment Fund, California Public Employees’ Retirement System (CalPERS), Hines, Tishman Speyer, Sam Zell’s Equity International, JP Morgan Partners and Amaranth Advisors are expected to establish their presence in the Indian real estate market. A few funds belonging to the Warren Buffet’s Berkshire Hathway are also interested.
Indian institutions such as HDFC, ICICI Venture and Kotak Mahindra would be launching funds to invest in real estate. ICICI Venture is raising Rs 750 crore real estate fund and is tying up with Tishman Speyer, while HDFC in association with SBI is raising about Rs 1000 crore for a real estate fund. HDFC is likely to invest in residential, commercial, and IT properties. Kotak will be raising a real estate fund.
Source: Dalal Street Investment Journal
Good info
THanks
Hi Manish,IFCI form says”Unsecured redeemable ,non convertible IFCI Long term infra bonds series – I eligible for tax deduction u/s 80CCF upto Rs.20000″. They are offering highest interest rate of 7.95%. Just wanted to chek what are your views about the issue. Is their any scope of other issuers like ICICI,LIC offering higher interest rate.
Nilay
I dont think so that LIC or any other can come up with any substantial differnece in interest rate , 0.1% or 0.2% is possible , but do you care for that ?
Manish
IFCI has came up with an issue.Max int is at 7.95%. Can someone clarify whether interest is taxable or not.
Finally should we wait for other issuers or go in and invest with IFCI as the issue is open only till 31st Aug.
NIlay
issues of what ? Debentures ? or share ? Interest will be taxable anyways .
manish
http://img508.imageshack.us/img508/3193/123wu.jpg
I think its average , Its giving 7.85% return (7.95% is on non-buy back one , which mean you can surrender them before 10 yrs) . The interest would be taxable , so its just like a Bank FD in return terms. This has just additional tax saving .
Manish
though it seems to suggest that ultra conservative investors should invest in these bonds,it seems unlikely that it is attractive enough for the pensioner who pays no tax. the only people who will be attracted by these bonds are people who want the tax savings right now and are ok to give up the alleged equity gains in the future.
it is a measure of people’s time preference of money.
aggressive or conservative allocation are not applicable here,imo
Hi all,
I was still waiting for the infra bonds to come out however there has been some deterents like to lock in the amount for such a long period in a low yielding instrument is not prudent apparantly. If we go by the past when infra bonds were part of section 88 then the rate offered was 6 % and 7% so this time around to assume it will be 8% is unfair. Also the credit rating, PPF has soveirgn guarantee but what about the NBFC issuing the bonds ? Secondly last time the maturity proceedings were taxable at the marginal rate, Can anyone tell if the interst is tax free or taxable because that will reduce the Yield to a couple of %age points for 30% guy.
Also as Srinivas pointed out one has to get 15% return out of market to match the return and no lock in will be an added advantage. Also the desired return for 20% and 10 % people is 12 % and 9.3% respectively to match the bond returns given the amount leftover after tax deduction. So go and make a chioce but one thing is certain. If you are in 10% tax bracket then blindly give them a miss. Why to lock your money for 5 years for 9.3 % return which even the worst performing MF has delivered. More so interest might be taxable which is even worse. So I will invest 10000 in bonds and save 20 % of the tax and invest rest 8000 in ICICI Emerging star or discovery (for long term mid cap and value funds are best) and wait who wins the race. The tortoise or the Hare -:)
Pramod
The interest would be taxable. You should not invest if you are ok with equity and locking in 5 yrs, The investors who feel , I cant make good return from Balanced funds in 5 yrs in India , but in safe bonds” should invest in these.
Manish
Very clever Manish, “The investors who feel , I cant make good return from Balanced funds in 5 yrs in India , but in safe bonds” should invest in these.” You indirectly has summed up all in this one sentence.
BTW whoever can read this, means he is reading this blog and whoever is reading this blog for sometimes would not be fitting into “the investor who feel …..” criterion so this implies that………. he he he!!!!!!!
Hi All,
I have decided not to invest in these bonds as of now, because of following reasons. I also fall in 30% tax slab
1. The returns from these bonds cannot exceed 10 years G-Sec returns, 10-year G-Sec yield is 7.6%. That means these bonds may offer 7.4% to 7.6%.
Assuming it offers 7.6%. Take up this calculation.
a) Amount to be invested is 20,000
b) Tax saved (30% of 20000) = 6,000
c) returns after 5 years = 28,846.
d) Total amount you get after 5 years + tax saved = 34,846/-
If the same 20,000 was invested for 5 years in Equity diversified MFs with most conservative CAGR returns of 12% then you get 35,247…..Rs. 401 extra.
If the CAGR returns is 15% then you get 40,227/-.
2. One more point is in MF, you can redeem anytime after 1 year according to your need but in infra bonds it is strictly 5 years.
3. DTC does not mention about Infra bonds that means, All the bonds purchased this year will mature after 5 years and many ppl will try to redeem money, since inflow of money is not well explained, outflow after 5 years, everybody at a time can be problem, from where these institutions return money.
Summary: As manish said, this product suits well for those who are near retirement (to save some tax) and have low risk appetite. Others better work out yourself and avoid this.
I found one more article, http://wealth.moneycontrol.com/columns/tax-planning/infrastructure-bonds-to-invest-or-not-to-invest-/14872/0
I think there is a flaw in you calculations. You are not counting that the tax component will be deducted when you invest in Equity.
So your calculations should read:
Invest 20K in infra bounds:
invested 20K
balance at 6% (conservative enough number) after 5 years = 20000*(1.06)^5 = 26764.51155
Invest after tax in equity:
Invested: 14000 (remember that you will have to pay 30% tax out of your 20000)
Balance at 12% returns = 14000*(1.12)^5 = 24672
balance at 15% returns = 28159
One thing I am not sure of is if the withdrawals will be tax free. If they are and since long term capital gains may not be tax free soon either, after 5 years, the infra bonds are not a bad bet since the returns are assured.
Gaurav
The withdrawels will be taxable , nothing other than PPF and EPF in debt category is non-taxable .
Manish
No, I will not Invest in Infrastructure Fund. If I invest remaining money, means after deduction of taxes in Mutual Fund or in Equity, definitely I will get good returns then this bond. That is not surety but yes the market is good and future of India is also good.
Vivek
All depends on your ability to take risk , investing in these bonds would mean high safety with locked value .
Manish
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I really doubt whether the interest rate would be attractive. Because the govt/financial institution is going to invest these funds into infrastructure development, which surely won’t give that healthy a return as compared to investing in equities or other investment bonds.
Some people may argue about the tax benefits that it is offering, but one must also take into consideration the returns that these bonds will offer. If the interest rate is not really attractive(at least 8%) then I don’t feel it would be a healthy tax-saving instrument, taking into consideration the locking period of 5 years.
And seeing the inflation rate kissing the 10% mark every now n then, even a return of 8% won’t suffice our common day-to-day life necessities.
As Manish said, it’s for people with “Ultra-Low” risk appetite. 🙂
Tarun
the only people I think this would make sense is people who are near retirement and have low risk appetite , some die hard LIC lovers can also put money in this . At the end of the day your money’s purchasing power will be almost save with some tax saving .
Manish
Here is an informative article on who should invest in these bonds:
http://economictimes.indiatimes.com/quickiearticleshow/5658366.cms
I am thinking of investing to save tax if not for the return since I belong to the 30% bracket. I wish they release them soon.
Things may change next year if the 3 lakh limit comes with DTC. Then this could alos be incl in 80C itself?
Pattu
No , this wont be part of sec 66 (replacement of sec 80C) after DTC comes into effect , this is what the current draft indicates, these bonds might be there for just 1 yrs i guess (i mean for tax saving , they will always be around) .
Manish
Manish,
Yes i would invest in these bonds, save some tax. I think it will be beneficial more to those in the 30% tax bracket. What do you think would be the Interest rate, I think they should keep it 8% to attract investment.
I would invest through LIC, what do you suggest.
Rakesh
Manish,
Thanks for letting us know. It is still skatchy but at least we should be prepared to save 20K in this area.
Rakesh,
I agree with you that people with 30% bracket should use this. I think the rate will be around 8% in line with other tax saving products like PPF etc. We should save in this as this will be safe and 8% with tax rebate is good rate. Equity may give a higher rate in 10 years duration but this should be used for the debt portion of asset allocation.
I think LIC is good, actually all of them are safe so I’ll go for the company paying highest interest. But, Govt has fixed the upper limit and thus I guess all of them will offer identical schemes.
Rakesh
The interest in these wont be 8% , it would be around 7% which is with typical bonds from govt , also they would be taxable , so post tax returns should be around 5-6%
Manish
Rakesh
I think it can get more attrative than what you think as after DTC , most of us would be in 10% bracket as we might be earning less than 10 lacs . For some 20% .
Manish