Investment up to Rs 20,000 eligible for tax break u/s. 80CCF of the Income Tax Act, 1961.
The government today allowed Life Insurance Corporation of India (LIC) and a few other finance companies to issue tax-free infrastructure bonds. An investment up to Rs 20,000 in these bonds will qualify for income tax deduction.
The rebate will also be allowed for bonds issued by Industrial Finance Corporation of India, Infrastructure Development Finance Company and any other non-banking finance company classified as an infrastructure finance company. The Reserve Bank of India (RBI) recently classified L&T Infrastructure as an infrastructure finance company.
The government has termed the bonds issued by these lenders as ‘long-term infrastructure bonds’, which will get deduction under Section 80CCF of the Income Tax Act. The tenure will be a minimum of 10 years, with a lock-in of five years for investors.
“Investment up to Rs 20,000 in these bonds will be eligible for deduction from the total income of the assessee. The deduction will be in addition to the deduction of Rs 1,00,000 allowed under sections 80C, 80CCC and 80CCD of the Act,” the finance ministry said in a press statement. It will be mandatory for the subscriber to give his permanent account number to the issuer.
“From our perspective, this will open another avenue for raising funds. It will help us diversify our borrowing base and bring down the cost of funds,” said Vikram Limaye, executive director, IDFC. He said IDFC would issue the bonds this financial year, depending upon its fund requirements and investor interest, which is normally better towards the end of the year.
The estimated spending on infrastructure in the 11th Five-Year Plan ending March 2012 is $500 billion (nearly Rs 25 lakh crore). The target has been doubled for the 12th Plan. The government is also planning to launch an $11-billion infrastructure fund. In the 2010-11 Budget, Finance Minister Pranab Mukherjee had said the government would issue tax-free bonds to meet the dual objective of encouraging savings and meeting long-term needs of the infrastructure sector.
In 2004, RBI allowed banks to issue infrastructure bonds with a maturity of five years and above. But bankers said they could not leverage this fully, as there was no incentive for people to subscribe to these bonds in the absence of tax benefits.
Also, there is an asset-liability mismatch as infrastructure projects require loans for 15-20 years, whereas banks do not have access to such long-term funds as most deposits have a lock-in of less than five years.