What are Infrastructure Bonds?

To start with, a bond is an instrument to borrow money.
Governments and companies need to borrow money for projects or expansion. Infrastructure bonds are borrowings to be invested in government funded infrastructure projects within a country. They are issued by governments or government authorised Infrastructure companies or Non- Banking Financial Companies.

How do Infrastructure bonds work?

Any Indian resident (not a minor) or a Hindu undivided family or can invest. Infrastructure bonds are good for people who need a fixed income. They offer a decent rate of interest and tax benefits. The maturity of these bonds is often between 10 to 15 years with an option to buy-back after a lock-in of 5 years. These bonds are listed either on or both National Stock Exchange or Bombay Stock Exchange that provides you with an option to exit after the lock-in period. A Lock-in period is when you cannot sell a particular instrument.

Example

An authority or company wants to raise Rs 5 crore from tax- free bonds. The price of each bond is Rs. 1000. It will issue 50000 units of bonds. The maturity period is ten years. The minimum investment is 5 bonds which is equal to Rs. 5000. You want to invest Rs 10000. If the interest rate which is known as the coupon rate is 10 %, your return per annum is Rs. 1000. So after 10 years, you get a total of Rs. 20000.

Why infrastructure bonds?
  • Additional tax saving
  • Convenience through Kotak Securities
  • Bonds listed on stock exchanges
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What are the tax benefits?

  • Investments up to Rs. 20000 are eligible for income tax deduction under Section 80 CCF of the Income Tax Act
  • This is over and above the Rs. 1 lakh deduction available under Section 80 C.
  • But interest income on the Bonds is applicable. (But no tax is deducted at source, if the annual interest is less than Rs. 5000).

Benefits of Infra bonds

  • Makes your investments easy to handle and monitor because of the Demat Form.
  • Listing on stock exchanges increases your liquidity.
  • Low risk involved, since issuing companies have high credit ratings.
  • You can assess the quality of instruments from the ratings issued by agencies like CARE, FITCH, CRISIL and ICRA.

Other Tax-Saving options in the equity market

Other tax-saving options for equity investors include Rajiv Gandhi Equity Savings Scheme (RGESS), Equity Linked Savings Scheme (ELSS), Unit Linked Insurance Plans (ULIPs) and Pension Funds.