Section 80CCF – Long Term Infrastructure Bonds – Srei Infrastructure Finance Ltd.

Srei Infrastructure Finance Limited (SIFL),) has announced a Public Issue of ‘Long Term Infrastructure Bonds’ with a face value of Rs 1000 each in the form of Secured Redeemable Non-Convertible Debentures, to be issued in one or more tranches not exceeding Rs 500 crores for the Fiscal 2011-12 (‘Shelf Limit), having benefits under Section 80CCF of the Income Tax Act, 1961 (“Issue”).

Issue Date and Listing: The first tranche of the Bonds (“Tranche 1 Bonds”) issue (“Tranche 1 Issue”) has opened for subscription on December 31, 2011 and closes on January 31, 2012 or earlier, as may be decided by the Board of the Company. The Bonds issued under Prospectus Tranche – I would be for an amount not exceeding Rs. 300 crores and are proposed to be listed on the BSE Limited (“BSE”).

Ratings: The Bonds proposed to be issued have been rated ‘CARE AA’ by CARE. The rating of the Bonds by CARE indicates high degree of safety with regards to timely servicing of financial obligations.

Issue Structure: The Issue would be in one or more tranches, for an amount not exceeding the Shelf Limit. The amount raised in the subsequent tranches shall not exceed the difference between the Shelf Limit and the aggregate amount raised by issue of Bonds under the previous tranches. The minimum number of bonds per applicant is 1 bond and in multiples of 1 bond thereafter for resident individuals as well as for Hindu Undivided Family (“HUF). An applicant may choose to apply for the Tranche 1 Bonds across the same series or different series. The mode of allotment for these Tranche 1 Bonds would be in dematerialized form, however the applicant may hold in the Bonds in physical or dematerialized form.

These Bonds are being issued in four series with Interest rate of 8.90% per annum for Series 1 and Series 2 and 9.15% per annum for Series 3 and Series 4. Interest under Series 1 and Series 3 will be payable annually and interest under Series 2 and Series 4 will be payable cumulatively (compounded annually). All Series of bonds will have a buy back option at the end of 5 years. The Bonds have a maturity period of 10 years and 15 years and shall have a lock-in period of 5 years and can be traded thereafter on BSE. The Face Value per Bond is `1,000.

The funds raised through the issue of the Tranche 1 Bonds will be utilized towards “Infrastructure Lending” as defined by Reserve Bank of India (“the RBI”) in the Regulations issued by it from time to time, after meeting the expenditures of, and related to the Tranche 1 Issue.

The Lead Managers to the Tranche 1 Issue are ICICI Securities Limited, Karvy Investor Services Limited, RR Investors Capital Services Private Limited and Srei Capital Markets Limited (a wholly owned subsidiary of the Company to be engaged only in marketing of the Tranche 1 Issue) The Co-Lead managers to the Issue are SMC Capitals Limited and Bajaj Capital Limited whilst Axis Trustee Services Limited is the Debenture Trustee to the Tranche 1 Issue.

Issue Highlights

• Issue of first tranche of infrastructure bonds (Bonds) by the Company under Section 80CCF of the Income Tax Act, 1961.
• Resident individuals and HUFs eligible for deduction of up to Rs 20,000 in computation of taxable income for the current financial year.
• “CARE AA” Credit Rating by CARE indicating high degree of safety with regards to timely servicing of financial obligations.
• The Bonds Issue opened on December 31, 2011 and closes on January 31, 2012
• The Bonds are proposed to be listed on BSE Limited

 80CCF Benefit: The Bonds have been classified as “Long Term Infrastructure Bonds” as per the terms of Section 80CCF of the Income Tax Act. As notified under Section 80CCF, an amount, not exceeding Rs 20,000 per annum, paid or deposited as subscription to Long Term Infrastructure Bonds during the previous year relevant to the assessment year beginning April 01, 2012, shall be deducted in computing the taxable income of a resident individual or HUF. In the event that any applicant applies for Bonds exceeding Rs 20,000 per annum, the aforesaid tax benefit shall be available to such applicant only to the extent of Rs 20,000 per annum.

STATEMENT OF TAX BENEFITS

A. INCOME TAX

1. Deduction u/s 80CCF of the I.T. Act

a) According to section 80CCF, an amount not exceeding Rupees twenty thousand invested in long term infrastructure bonds shall be allowed to be deducted from the total income of an Individual or a Hindu Undivided Family. This deduction shall be available over and above the aggregate limit of ` One Lakh as provided under sections 80C, 80CCC and 80CCD read with section 80CCE;

b) Section 80CCF reads as “In computing the total income of an assessee, being an individual or a Hindu undivided family, there shall be deducted, the whole of the amount, to the extent such amount does not exceed twenty thousand rupees, paid or deposited, during the previous year relevant to the assessment year beginning on the 1st day of April, 2012, as subscription to long term infrastructure bonds as may, for the purposes of this section, be notified by the Central Government.”

2. No income tax is deductible at source on interest on bonds as per the provisions of section 193 of the I.T.

Act in respect of the following:

a) In case the payment of interest on bonds to resident individual Bond Holder by the company is by an account payee cheque and such bonds are listed on a recognized stock exchange in India, provided the amount of interest or the aggregate of the amounts of such interest paid or likely to be paid during the financial year to such individual does not exceed ` 2500;

b) When the Assessing Officer issues a certificate on an application by a Bond Holder on satisfaction that the total income of the Bond Holder justifies nil/lower deduction of tax at source as per the provisions of Section 197(1) of the I.T. Act and that certificate is filed with the Company before the prescribed date of closure of books for payment of bond interest.

c) When the resident Bond Holder (not being a company or a firm or a senior citizen) submits a declaration to the payer in the prescribed Form 1 5G verified in the prescribed manner to the effect that the tax on his estimated total income of the financial year in which such income is to be included in computing his total income will be ‘nil’, as per the provisions of Section 1 97A (1A) of the I.T. Act. Under Section 1 97A (1B) of the I.T. Act, Form 1 5G cannot be submitted nor considered for exemption from deduction of tax at source if the aggregate of income of the nature referred to in the said section, viz. dividend, interest, etc as prescribed therein, credited or paid or likely to be credited or paid during the financial year in which such income is to be included exceeds the maximum amount which is not chargeable to tax. To illustrate, the maximum amount of income not chargeable to tax in case of individuals (other than women assessees and senior citizens) and HUFs is ` 180,000, in case of women assesses is ` 190, 000, in case of senior citizen who are 60 or more years of age but less than 80 years is ` 250, 000 and in case of senior citizen who are 80 or more years of age is ` 500,000 for financial year 2011-12. Senior citizens, who are 65 or more years of age at any time during the financial year, enjoy the special privilege to submit a self declaration to the payer in the prescribed Form 1 5H for non-deduction of tax at source in accordance with the provisions of section 197A (1C) of the I.T. Act even if the aggregate income credited or paid or likely to be credited or paid exceeds the maximum amount not chargeable to tax i.e. ` 250,000 or ` 5,00,000 for very senior citizen for FY 2011-12, provided tax on his estimated total income of the financial year in which such income is to be included in computing his total income will be nil.

d) On any securities issued by a company in a dematerialized form listed on a recognized stock exchange in India. (w.e.f. 1.06.2008).

In all other situations, tax would be deducted at source as per the prevailing provisions of the I.T. Act.

3. Under section 2 (29A) of the I.T. Act, read with section 2 (42A) of the I.T. Act, a listed bonds is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer.

Under section 112 of the I.T. Act, capital gains arising on the transfer of long term capital assets being listed securities are subject to tax at the rate of 20% of capital gains calculated after indexation of the cost of acquisition or 10% of capital gains without indexation of the cost of acquisition. The capital gains will be  computed by deducting expenditure incurred in connection with such transfer and cost of acquisition/indexed cost of acquisition of the bonds from the sale consideration.

In case of an individual or HUF, being a resident, where the total income as reduced by the long term capital gains is below the maximum amount not chargeable to tax i.e. Rs. 180,000 in case of all individuals, ` 190000 in case of women, Rs. 250,000 in case of senior citizens and Rs. 500,000 in case of very senior citizens, the long term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and the tax on the balance of such long-term capital gains shall be computed at the rate of 10%/20% in accordance with and the proviso to sub-section (1) of section 112 of the I.T. Act read with CBDT Circular 721 dated September 13, 1995.A 2% education cess and 1% secondary and higher education cess on the total income tax (including surcharge) is payable by all categories of tax payers.

4. Short-term capital gains on the transfer of listed bonds, where bonds are held for a period of not more than 12 months would be taxed at the normal rates of tax in accordance with and subject to the provision of the I.T. Act.

The provisions related to minimum amount not chargeable to tax, education cess and secondary and higher secondary cess described at para 3 above would also apply to such short-term capital gains.

5. In case the bonds are held as stock in trade, the income on transfer of bonds would be taxed as business income or loss in accordance with and subject to the provisions of the I.T. Act.

6.(i) Under section 54 EC of the Act and subject to the conditions and to the extent specified therein, long term capital gains arising to the bondholders on transfer of their bonds shall not be chargeable to tax to the extent such capital gains are invested in certain notified bonds within six months from the date of transfer. If only part of the capital gain is so invested, the exemption shall be proportionately reduced. However, if the said notified bonds are transferred or converted into money within a period of three years from their date of acquisition, the amount of capital gains exempted earlier would become chargeable to tax as long term capital gains in the year in which the bonds are transferred or converted into money. Where the benefit of section 54EC of the Act has been availed of on investments in the notified bonds, a deduction from the income with reference to such cost shall not be allowed under section 80 C of the Act.

(ii) As per the provisions of section 54F of the Act and subject to the conditions specified therein, any long term capital gains (not being on a residential house) arising to a bondholder who is an individual or Hindu Undivided Family, are exempt from capital gains tax if the entire net sales consideration is utilised, within a period of one year before, or two years after the date of transfer, in purchase of a new residential house, or for construction of residential house within three years from the date of transfer. If part of such net sales consideration is invested within the prescribed period in a residential house, then such gains would be chargeable to tax on a proportionate basis. The bondholder should not own more than one residential house (other than the new residential house referred above) on the date of transfer of the original asset. If the residential house in which the investment has been made is transferred within a period of three years from the date of its purchase or construction, the amount of capital gains tax exempted earlier would become chargeable to tax as long term capital gains in the year in which such residential house is transferred. Similarly, if the shareholder purchases within a period of two years or constructs within a period of three years after the date of transfer of capital asset, another residential house (other than the new residential house referred above), then the original exemption will be taxed as capital gains in the year in which the additional residential house is acquired.

7. As per section 56(2) (vii)(c) of the I.T. Act, in case where an individual or Hindu undivided Family receives bonds from any person on or after 1st October, 2009:-

A. without any consideration, aggregate fair market value of which exceeds fifty thousand rupees, then the whole of the aggregate fair market value of such bonds or;

B. for a consideration which is less than the aggregate fair market value of the bonds by an amount exceeding fifty thousand rupees, then the aggregate fair market value of such bonds as exceeds such consideration;

shall be taxable as the income of the recipient under the head “Income from Other Sources”. However, the aforesaid shall not apply in certain situations, like:-

(a) Bonds received from any relative; or

(b) On the occasion of the marriage of the individual; or

(c) Under a will or by way of inheritance; or

(d) In contemplation of death of the payer or donor, as the case may be; or

(e) From any local authority as defined in the Explanation to clause (20) of section 10; or

(f) From any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution; or

(g) From any trust or institution registered under section 12AA.

B. WEALTH TAX

Wealth tax is not levied on investment in bonds under sec 2(ea) of Wealth Tax Act, 1957.

C. GIFT TAX

Gift-tax is not levied on gift of Bonds in the hands of the donor as well as the donee.

D. DIRECT TAX CODE

The Honourable Finance Minister has presented the Direct Tax Code Bill, 2010 (‘DTC Bill’) on August 30, 2010, which is proposed to be effective from April 1, 2012. The DTC Bill is likely to be presented before the Indian Parliament. Accordingly, it is currently unclear what effect the Direct Tax Code would have on the investors.

(c)     Under a will or by way of inheritance; or

(d)     In contemplation of death of the payer or donor, as the case may be; or

(e)     From any local authority as defined in the Explanation to clause (20) of section 10; or

(f)      From any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution; or

(g) From any trust or institution registered under section 12AA.

B.                  WEALTH TAX

Wealth tax is not levied on investment in bonds under sec 2(ea) of Wealth Tax Act, 1957.

C.                  GIFT TAX

Gift-tax is not levied on gift of Bonds in the hands of the donor as well as the donee. D.    DIRECT TAX CODE

The Honourable Finance Minister has presented the Direct Tax Code Bill, 2010 (‘DTC Bill’) on August 30, 2010, which is proposed to be effective from April 1, 2012. The DTC Bill is likely to be presented before the Indian Parliament. Accordingly, it is currently unclear what effect the Direct Tax Code would have on the investors.