Tuesday, January 10, 2012

Should you invest in Tax-saving Infrastructure bonds

First of all, a word of caution about the "realized" return the companies or agents tell you. Most of them exaggerate the returns because they assume that you fall in 30% tax bracket when you are investing and you fall in 0% tax bracket when you receive the interest and so they don't factor in the tax on annual interest received. Obviously if you are in 30% tax bracket this year, it is highly unlikely that you will be in 0% tax bracket next year.

Let's look at the real "realized" returns. We will consider that if you are in 10% income tax bracket today, you will be in the same tax bracket in the coming years. The real returns are higher than the interest rates because you save tax under section 80 CCF on investments upto Rs 20,000 in infrastructure bonds.

Here is a list of some of the current infrastructure bonds in market (2012 Infrastructure bonds), which can help you save tax for the current FY 2011-12. (Last date mentioned are for current tranches)

http://www.idfc.com/infrastructure_bond/scheme_features.htm (Last date: Feb 25, 2012)

http://www.ltinfrabond.com/index.aspx (Last date: Feb 11, 2012)

http://recindia.nic.in/infra.html (Last date: Feb 10, 2012)

Let's look at the real returns from the IDFC bonds.

This is the return table IDFC has provided (for investments upto Rs 20,000):

This is the real "realized" return (for investments upto Rs 20,000):

As we can see, the returns are not as high as claimed by IDFC and some of the advisors/agents. However, the real returns are still good compared to several other investment options.

Couple of points to note are:

1. infrastructure bonds provide the tax exemption over and above the 1 lakh limit which other instruments like PF, PPF, NSC etc provide in Sec 80.

2. It is better to use the buyback option provided at the end of 5 years compared to holding the bonds till maturity.

Though we took the specific example of IDFC bonds, but the same is applicable for infrastructure bonds by L&T and REC as well.


  1. Annual Interest coming out of infrastructure Bond is added to your taxable income ?

    1. Yes, whether you take cumulative or annual, the interest is added to taxable income. The interest is taxable in most of the investments including bank FDs. However even with tax on interest, the infrastructure bonds give quite good returns as in the above table. The plus point of infrastructure bonds is that it gives you tax benefit for additional 20,000 of investment over & above 1,00,000 limit for other investments.