During the financial year 2010-2011, Investors will take tax benefits by investing in the long term infrastructure bonds. Infrastructure bonds came as the relief to the person taxpayers in context of expenses as well as saving. It is available via issues of ICICI Bank and IDBI, and carried out in the name of ICICI Safety Bonds and Flexi bonds.
To take the benefits of tax savings, investor must invest up to 20,000 in infrastructure bonds. These tax-saving benefits provides under Section 88 of the Income Tax Act, 1961. Infrastructure bonds are one of the fresh tax reliefs in the 2010 budget. The announcement of the tax free Infrastructure Bonds not only surprised the common man but also the industry observers.
Investments benefits in Infrastructure Bonds
The main benefit of Investments Infrastructure Bonds is investor save on taxes. The two important economic factors playing very important role in the investment decisions in the infrastructure bonds are Inflation and interest rate movements.
| Tax Rate | Investments in Infrastructure | ||
| Slab | Tax Savings | Returns | |
| After 3 years | After 5 years | ||
| 30% | 6,000 | 2,000 | 32,139 |
| 20% | 4,000 | 27,485 | 30,139 |
| 10% | 2,000 | 25,485 | 28,139 |
| Obligatory Returns to defy Inflation Effect | 25,194 | 29,387 | |
| Tax Rate | Tax fortified in lieu of investing in Infrastructure Bonds | |
| Slab | Yields on investments from Market after Tax | |
| After 3 years | After 5 years | |
| 30% | 21,292 | 28,159 |
| 20% | 24,334 | 32,182 |
| 10% | 27,376 | 36,204 |
Some notable points for Infrastructure Bonds
- The investment in other products like mutual funds are connected with market and not guaranteed and so returns may not be repeated in the future.
- India’s Infrastructure Bonds 3 year lock-in period offers reasonably good return and they are competent of delivering going forward.
- Investors who want to invest in risk free investment products might be disinclined to venture into market-linked products.
- An investor with an appetite for risk can get two goals simultaneously, paying the taxes and investing in a well-diversified equity / balanced scheme.
- The risks connected with mutual fund investment are much higher than the Infrastructure Bonds India.
- Investments must be controlled by investor’s risk-appetite and not on the scale of returns.
- The goal of behind investing in Infrastructure Bonds India that is tax saving.
Points noted before investing in infrastructure bonds
- Since the rate of interest Infrastructure Bonds offers pre-determined, they never offer any protection against high inflation.
- One can borrow money from banks, against the promising of the infrastructure Bonds with a bank. The amount depends on the bond market value and the credit quality of the instrument.
- Additionally, it should be noted that although Infrastructure Bonds are measured to be safe, there is no guarantee of receiving the full investment back.
How to invest in infrastructure bonds?
Infrastructure Bonds are available though issues of ICICI and IDBI with the name of ICICI Safety Bonds and IDBI Flexibonds. They can decrease up to Rs 16,000 tax charge per annum. Investors gets purchasing and holding the instruments options either as physical certificates or in the demat form.
- Face value of Rs 5,000 for 3 years at the rate of 9.00% interest payable annually.
- Deep Discount Bonds with a face value of Rs 6,600. These bonds are available for Rs 5,000, and are issued for 3 years and 4 months, after which they are redeemed at their face value.
- Apart from the above Infrastructure Bonds, Rural Electrification Corporation (REC) has come out with an issue of tax-saving infrastructure bonds for investors looking for to use the additional Rs 30,000 qualifying limit for investments in Infrastructure Bonds.
Tax groups post budget 2010
Tax group 1: Taxable income Rs. 1.6-5 lakhs
Tax group 2: Taxable income Rs. 5-8 Lakhs
Tax group 3: Taxable income above Rs. 8 lakhs
After the understating the pros and cons of any tax saving investment, people need to look at 4 major parameters:
1. Actual tax saving: First parameter was actual tax saved on the investment. If you invest Rs 20000 in the instrument you get to reduce your taxable income by 20,000 thus giving a 10% benefit.
2. Returns from the investment: During the lock in period of 3 years an investment of 20000 the interest earned would be Rs. 3484, so total returns on our investment is Rs 25485 (Rs 20000+3484+2000).
3. Opportunity cost : If you have invested this same amount in a market instrument instead of infrastructure Bonds that fetched a return of 15% the effective return will be Rs 27, 376 (Rs 20000-2000=Rs 18000 invested @15% per annum for 3 years).
4. Effect of Inflation on the returns on investment : At 8% inflation rate the minimum amount required to counter the inflation is Rs 25, 194.
