What are tax-saving infrastructure bonds ?

These are special bonds issued by institutions such as Industrial Finance Corporation of India (IFCI), Infrastructure Development Finance Corporation (IDFC) and any non-banking financial company, also called infrastructure finance company by the Reserve Bank of India. In financial year 2010-11, the likes of Larsen & Toubro (L&T), India Infrastructure Finance Company Limited (IIFCL), Power Finance Corporation (PFC) and IDFC issued these in tranches. Next year, these will be issued again.

Why have these been introduced?
These are long-term bonds, which will invest in government’s infrastructure projects. The issuing companies act as intermediaries, borrowing from investors and lending, or investing in such long gestation projects. The maturity period for these bonds is mostly 10-15 years.

Usually, these have a lock-in period of five-seven years. Post this, the issuer can exercise the buyback option.

These bonds also get listed on the stock exchanges, providing you a second exit route. But these are not traded actively in the secondary market.

Returns from these bonds will not exceed the yield on 10-year government securities. You can choose from an annual or cumulative payout. In the former, you will receive the interest amount each year. While in the latter, the interest gets added to the investment amount each year and enjoys the benefit of compounding over the investment period.

Why should you invest?
Investment in infrastructure bonds is advisable from a tax-planning perspective, as you get an additional exemption on Rs 20,000. There is a special section — 80CCF — that the Ministry Of Finance has added to the Income Tax Act for the same.

However, taxpayers can consider investing in these bonds, only once they have exhausted the Section 80C limit of Rs 1 lakh. Individuals belonging to the highest income tax paying group (falling in the 30.9 per cent bracket), across all age groups can also look at this product.

Senior citizens, in the highest tax bracket, can opt for an annual payout for a regular return. The Rs 20,000 invested in these bonds will be exempted from taxation under Section 80CCF, but the interest earned will be added to your income and taxed according to the slab.