Interest earned on infra bonds is taxable
Senior Tax professional, Ernst & Young
Amit Kumar recently saved R6,180 by investing in infrastructure bonds worth R20,000, which are eligible for a deduction under Section 80CCF of the Income Tax Act, 1961. Deduction under Section 80CCF of the I-T Act was introduced by Finance Act, 2010 to encourage savings as well as to ensure the deployment of the savings in infrastructure sector. This deduction has a ceiling of R20,000 which is over and above the deduction of R1 lakh covered under Section 80C, 80CCC and 80CCD of the I-T Act.
The Centre vide notification has specified the following long-term infrastructure bonds which would qualify for deduction under section 80CCF of the I-T Act: bonds of IFCI, LIC, IDFCL, IIFCL and a non-banking finance company classified as an infrastructure finance company by RBI.
Investment of R20,000 in these infrastructure bonds would help the investor save tax depending on the rate at which he is liable to pay tax like R2,060 if taxed at 10.30%; R4,120 if taxed at 20.60% and R6,180 if taxed at 30.90%.
Besides tax savings, infrastructure bonds provide higher rate of return compared to the savings account. While there is no risk as far as the underlying asset of these investments is concerned, the embedded risk lies with respect to the institution offering these bonds. It is thus important for the investor to carefully scrutinise the credibility of the institution offering these bonds. Investment in these bonds comes with a minimum investment clause. Every bond issuer has different terms as some bonds are open only for demat account holders, while some issues are available to people who want to subscribe via physical form as well.
The not so good aspect is that these bonds come with a minimum lock-in period, which varies on the scheme of the bonds. On completion of the lock-in period, these bonds can be traded on the stock exchange or may be bought back depending on the terms of the plan. If the investor chooses to trade these bonds in the stock exchanges after the lock-in period, any gains accrued thereon shall also be subject to long-term capital gains tax. Interest earned on these infrastructure bonds is chargeable to tax at normal tax rates.
The proposed Direct Tax Code (DTC) has increased the quantum of deductions for savings – life insurance, health insurance and education of children – to R150,000, but it has left infrastructure bonds out of the ambit of tax-saving investments. Does this imply that infrastructure bonds would lose their status as tax saving instrument once DTC comes into play? As of now, there is no clarity on the future of the infrastructure bonds and there are varying opinions. To be able to encash on the tax savings, consider investing in these infrastructure bonds before the current financial year ends.
* The writer is senior tax professional, Ernst & Young