SAVING TAX THROUGH INFRASTRUCTURE BONDS

[Dr. Sanjiv Agarwal]

In 2010-11 Union Budget Finance Minister made an announcement that an additional deduction upto Rs 20000 would be allowed from the total income of taxpayer if investment is made in long term infrastructure bonds (which were to be notified later). This investment and deduction of Rs 20000 in income tax (under section 80 CCF) is over and above the existing aggregate deduction of Rs 1 lakh under section 80C, 80CCC and 80 CCD. The new deduction of Rs 20000 has been introduced under new section 80 CCF w.e.f. assessment year 2011-12, ie, if one invests now, he can claim the deduction from current year's income while filing the tax return next year. Any individual or a Hindu Undivided Family (HUF) can claim this deduction of the whole of the amount paid or deposited during 2010-11 as subscription to notified long term infrastructure bonds (LTIB) subject to an upper ceiling of Rs 20000 in a year.

Central Government had earlier in July 2010 (on 9th July) issued a Notification (Notification No 48/2010 dated 9.7.2010) to this effect. Accordingly, bonds will be called long term infrastructure bonds and can be issued by institutions such as IFCI, IDFC, LIC and infrastructure finance companies. The bonds are allowed to be issued in current year with monetary ceiling of 25 percent of incremental infrastructure investment made by issuer company in previous year. While mention of income tax Permanent Account Number (PAN) shall be mandatory for the investors, the bonds shall offer liquidity or exit route through secondary market or buy-back facility as may be specified by the issuer. Also, while lock- in of five years and a long tenure of ten years is specified, LTIBs shall be allowed to be pledged or under lien or hypothecation for obtaining bank loans after five years. The yields may not be very lucrative as the yield will not exceed yield on Government securities of similar residual value prevailing at the time when LTIBs are issued. Investors have also been assured against any misuse of funds as such use shall be required to be reported in annual reports submitted to regulatory authorities and also be certified by the statutory auditors. The end use shall be for infrastructure lending as per Reserve Bank's Guidelines.

Tax Saving Infra Bonds: Bird's Eye view

* New section 80 CCF of Income Tax Act, 1961

* Additional deduction up Rs 20000

* W.e.f. financial year 2010-11 (AY 2011-12)

* Benefit only to individual tax payers and HUFs only.

* Deduction over & above Rs 1 lakh in section 80 C, 80 CCC and 80 CCD.

* Bond tenure of minimum 10 years

* 5 years lock- in

* Liquidity through redemption / stock market

* Can be pledged /hypothecated for loans

* PAN mention mandatory in all cases

* To be issued by Financial institutions/ LIC / Infrastructure companies

* Bond yield not to exceed yield on Government securities

* Use of funds allowed for infrastructure lending

According to the scheme, LTIBs can be issued only by the following institutions-

(a) Industrial Finance Corporation of India.

(b) Life Insurance Corporation of India.

(c) Infra structure Development Finance Company Ltd.

(d) Non banking finance company, being an infrastructure finance company under Reserve Bank of India guidelines.

As such, only aforementioned four institutions can issue LTIBs. Institutions like financial institutions, banks, mutual funds, general insurance companies or even mutual funds and private insurers can not issue LTIBs. The money so raised will only be deployed towards onward lending for infrastructure purposes only.

There will also be a cap on fund raising by the eligible institutions, ie, the total amount which can be raised from LTIBs during the financial year 2010-11 shall be restricted to twenty five percent of the incremental infrastructure investments made by the LTIB issuing institution during the preceding financial year 2009-10. For this purpose of limit, investment would include loans, bonds, other debt forms, quasi equity, preferential equity shares and equity capital.

The conditions for issuance of LTIBs are tough so much so that not all banks and institutions have been permitted to use infrastructure bonds route for raising money. There is a restriction, both on institutions as well as the use of funds. Looking to the nature of infrastructure projects which are generally for long period, the tenure of the bonds has been kept at ten years so that the borrowing institution can be assured of long term fund planning without pressure of redemption and liquidity mismatch. Moreover, in order to provide liquidity to the investors, following measure have been taken-

(a) Investors can liquidate the bonds after a period of five year, ie, a minimum lock- in period of five year has been provided.

(b) After the lock - in, investors desirous of liquidating the bonds may exit either through the secondary market (implying that such bonds may also be listed on stock exchanges) or through a buy- back facility, as specified by the issuer in the offer document.

(c) Bonds shall also be allowed as a pledge or lien or hypothecation for obtaining loans but from scheduled commercial banks only offers the lock- in period.

However, both ten year and five year are considered to be a real long term periods and investors may be discouraged to exercise the exit route after five years.

LTIBs shall thus, offer additional tax savings as the assessee who invests Rs 20000 would save tax of Rs 6180 @ 30 percent including education cess. The interest and other terms and conditions will be prescribed by the issuer subject to the yield not being more than the yield on Government securities of similar duration. It may be noted such yield will be one which is reported by the Fixed Income Money Market and Derivative Association of India on the last working day of the month immediately preceding the month in which LTIBs are issued. However, one can expect a return of around 6-7 percent which means a post tax return of over 8 percent. LTIBs offer a lucrative option for incremental tax saving but for a really long term (10 years). However, when we compute long term gains on shares, a period of one year is considered as long term and for other assets, it is three years. We may witness such bonds issues hitting the market in next few months but a wise investor could better wait for few issues to understand and then plan investment in LTIBs.