In the Union Budget 2010, Finance Minister, Pranab Mukherjee proposed a new section 80CCF under the Income Tax Act of 1961. From financial year 2010-11, section 80CCF would provide an additional tax deduction, over and above the existing 80C deduction, in respect to investments made in long term infrastructure bonds.

Background:-Infrastructure Bonds are not new to the country. They have been used by the government in the past years, for infrastructure projects. These bonds were earlier offered by financial institutions such as ICICI and IDBI, and had a lock in period of 3 years. Section 88 of the Income Tax Act offered tax deductions on investments of up to Rs 30,000, in these infrastructure bonds. However, with the 2005-2006 union budget, section 88 was scrapped.
So What Does Section 80 CCF Offer Tax Payers?

Section 80C currently offers a maximum deduction of Rs 1 lakh, for investments in National Savings Certificate (NSC), Public Provident Fund (PPF), Life Insurance premiums and Pension Plans.
The new section 80CCF, will offer a deduction of Rs 20,000, in addition to the deduction of Rs 1 lakh under sections 80C, provided the investments are in notified long term infrastructure bonds. The government has proposed this section to promote investments in infrastructure projects in the country.

Key Features of 80 CCF and Infrastructure Bonds

• Section applicable from Assessment Year 2011-12.
• Deduction is available on amount invested in eligible Long Term Infrastructure Bond issued in the financial year 2010-11.
• Deduction limit of Rs 20,000 in addition to the 1 lakh limit under sections 80C, 80 CCC and 80 CCD.
• Deduction under this section is available only to individual and HUFs tax payers.
• In the event that any applicant applies for the bonds in excess of Rs 20,000 p.a., the aforestated tax benefit shall be available to such applicant only to the extent of Rs 20,000 p.a.
• Investments to be in long term infrastructure bonds as specified by the government.
• The long term infrastructure bonds will have tenure of 10 years.
• Minimum lock in period of 5 years.
• Exit from the infrastructure bond, after the lock in period, will be either through the secondary market or through buyback option, as specified by issuer.
• The infrastructure bonds could be pledged for loans from specified banks after the lock in period.
• Investments in infrastructure bonds would require PAN to be mandatorily furnished.
• Can be pledged /hypothecated for loans
• Bond yield not to exceed yield on Government securities
• Use of funds allowed for infrastructure lending
• Infrastructure bonds offer pre-determined interest rates, which may be lower than other investment options; hence they may not offer much protection against inflation.
• Borrowing money by pledging infrastructure bonds with banks would fetch you an amount, which would depend on the market value of the bond. Banks also take into account the creditability of the underlying issuer, in their loan evaluation process.

Liquidity Measures: – In order to provide liquidity to the investors, following measure have been taken-

(a)                Investors can liquidate the bonds after a period of five year, ie, a minimum lock- in period of five year has been provided.

(b)               After the lock – in, investors desirous of liquidating the bonds may exit either through the secondary market or through a buy- back facility, as specified by the issuer in the offer document.

(c)                Bonds shall also be allowed as a pledge or lien or hypothecation for obtaining loans but from scheduled commercial banks only offers the lock- in period.
Eligible Long Term Infrastructure Bonds- Long Term Infrastructure Bonds issued by the following agencies would qualify for tax benefit under section 80CCF.

• • Industrial Finance Corporation of India
  • Life Insurance Corporation of India
  • Infrastructure Development Finance Company
  • Any non-banking finance company which has been classified as an infrastructure finance company by the Reserve Bank of India.

Current Issue: – Currently IDFC has come out with its first issue of long term infrastructure bonds. The issue opened on 30^th September 2010 and closes on 18^th October 2010. The bonds with a tenor of 10 years have a buy back option after 5 years.
Infrastructure Bonds – Benefit: – Investment in long term infrastructure bonds would give you the following benefits:

• Tax Saving – A long term infrastructure bond offers a tax benefit in the form of a deduction. The amount of tax saved would depend on the tax bracket one would fall under. To illustrate this benefit:

For a person in the highest tax bracket, a Rs 20,000 investment in long term infrastructure bonds could save a tax of around Rs 6,000 (Rs 20,000 X 30%)
For a person in the 20% tax bracket, an investment of Rs 20,000 in long term infrastructure bonds could give him a saving of around Rs 4,000 (20,000 X 20%).
(Education cess ignored in illustration to keep it simple)

LTIBs offer  a lucrative option for incremental tax saving but for a really long term (10 years).  However, when we compute long term gains on shares, a period of one year is considered as long term and for other assets, it is three years.

Assured Returns – An investment in infrastructure bond assures you a reasonable rate of return. So as an investor you are guaranteed peace of mind over your investment