IFCI's new infra bonds can help save additional tax

Labourers are silhouetted by the sun during sunset at a construction site in New Delhi December 31, 2005. The initial response to IFCI’s infrastructure bonds has been good, a company official said, with additional tax-saving incentive making them an attractive option for investors.

NEW DELHI (Reuters) - The initial response to IFCI’s infrastructure bonds has been good, a company official said, with additional tax-saving incentive making them an attractive option for investors.

Such bonds, proposed by Finance Minister Pranab Mukherjee in his 2010 budget speech, can help save additional tax under Section 80CCF of the Income Tax Act for an investment of up to 20,000 rupees.

"We are hoping for the best. So far response is very good … people are very enthused," Atul Rai, chief executive officer of IFCI told Reuters last week.

"Infrastructure bond as you know the major incentive here is the tax benefits."

India aims to spend $500 billion on infrastructure in the five years to end March 2012 and the government has set a target to double investment in the sector to $1 trillion between 2012 and 2017.

The exemption for these bonds would be considered over and above the standard Section 80C limit of rupees 100,000.

In early July, the finance ministry said that such bonds, to be issued by IFCI, LIC, IDFC and RBI-approved non-banking infrastructure finance companies, will have a minimum tenure of 10 years and a lock-in period of five years.

SAVINGS & BOND OPTIONS

IFCI’s bonds have four options to choose from, offering an interest rate of 7.85 percent and 7.95 percent annually, with options such as buyback/non-buyback with cumulative/non-cumulative interest rates.

While Option I and Option II offer 7.85 percent annual return and a buyback facility exercisable after 5 years, Option III and Option IV can get investors 7.95 percent annual returns, with redemption possible after 10 years.

According to the application form, an investment of 20,000 rupees can be redeemed for 29,184 rupees after 5 years, under Option II which offers buyback facility and cumulative interest rate of 7.85 percent annually.

"Someone in the highest tax slab (30 percent) could save slightly above 6,000 rupees (in taxes)," said Kartik Varma, co-founder, iTrust Financial Advisors.

However, investors should note that interest earned on these bonds would be taxable.

Those investing in these bonds, which are proposed to be listed on the BSE and are open for subscription till August 31, need to submit a copy of their PAN card along with the form and fill in their demat account details.

"If you have surplus capital, want to take an additional tax deduction, and are unallocated within your entire portfolio towards debt instruments … a yield close to 8 percent is pretty decent,” Varma said.

(Additional reporting by Sanjeev Choudhary, Editing by Tony Tharakan)

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