Section 80C - Tax Deductions from Infrastructure Bonds

Investing in infrastructure bonds is encouraged by the government by providing tax benefits under Section 80C of the Income Tax Act. Tax deductions can be to a maximum limit of Rs.20,000.

Few options are better than infrastructure bonds when it comes to tax-saving investments. Infrastructure companies issue these bonds after they have been approved by the government. The tax benefits offered by the bonds in addition to competitive rates of interest have contributed to their rise in popularity among investors. Section 80C of the Income Tax Act states that investments to the extent of Rs.20,000 in infrastructure bonds qualify for income tax deduction, but the limit is over and above the Rs.1 lacs deduction that individuals can claim under Section 80C as they are long-term secured bonds that mature in 10 to 15 years.

PFC and IFCI Ltd. recently stopped issuing infrastructure bonds, while some others like L&T Infrastructure, LIC, India Infrastructure Finance Company and Infrastructure Development Finance Company are all set to release their issues.

Eligibility Criteria

All Indian citizens who are older than 18 years of age, and Hindu Undivided Families may invest in infrastructure bonds. Ideally, each individual can only submit one application as multiple applications could be aggregated depending upon the PAN (permanent account number). Individuals will only be eligible for tax benefits on investments to the extent of Rs.20,000, and the bonds can be held in either physical form or demat.

The least amount of money that can be invested in infrastructure bonds is Rs.5000 and there is no cap, but individuals will only be eligible for tax deductions to the extent of Rs.20,000. However, individuals can make the most of the buyback option where the bonds can be surrendered by the investor after a period of five years, and his / her interest income will not have to be sacrificed either. The bonds can be traded any time after the lock-in period of five years has lapsed.

Who is Authorised to Issue Infrastructure Bonds?

The Industrial Finance Corporation of India, Life Insurance Corporation of India, Infrastructure Development Finance Company and any non-banking financial institution recognised by the Reserve Bank of India as an infrastructure finance company can issue infrastructure bonds.

The money invested in infrastructure bonds is usually invested in the construction of infrastructure such as airports, ports, roads and power plants. Infrastructure bonds are great for both investors as well as the government as the investor can save money on taxes by investing in these bonds while the government can use the funds invested in this bond to improve the country’s infrastructure.

Yields of Infrastructure Bonds

In case the bonds are traded on stock exchanges, investors may sell them after five years by either manually redeeming them from the issuer or on exchange. Yields, however, will vary from issuer to issuer and according to the government and the FIMMDA (Fixed Income Money Market and Derivatives Association of India), will not be more than the returns from government securities of similar residual maturity bonds.

Taxation of Infrastructure Bonds

The interest accrued will be added to the individual’s income before being taxed depending upon the individual’s income tax slab. In case the yearly income is lower than Rs.2500, no tax will be deducted at source. Since individuals can claim income tax deduction in excess of the Rs.1 lac limit by investing in infrastructure bonds under Section 80C, they can opt for these bonds in case their former limit has already been exhausted. Individuals can also claim additional tax benefits by investing up to Rs.20,000.

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