Bank FD or Infrastructure bonds

Some people ask the question whether to go for Bank FD or Infrastructure bonds. Really there is no need for comparison of Bank FD with Infrastructure bonds.

The reason is simple: The amount of investment which qualifies for Sec 80 rebate is normally Rs 1,00,000 (includes PF, PPF, ELSS i.e. tax saving mutual fund, NSC, 5 year bank FD etc). If you plan to invest only upto Rs 1,00,000, just go for the investment which gives you better return. So in that case, if SBI FD is offering 9.25%, it is better than an infrastructure bond offering 8.7%. Both have a lock in period of 5 years. The interest from both is taxable. Whichever offers better rate of interest, go for it. The bank FD is compounded quarterly which is an additional benefit.

The only advantage infrastructure bonds have over bank FDs is when you plan to invest more than Rs. 1,00,000 in the financial year. The infrastructure bonds provide you tax saving on Rs 20,000 over and above the 1,00,000 limit. So, if you make a total investment of Rs 1,20,000 including at least 20,000 in infrastructure bonds, you will get tax benefit on complete 1,20,000. But if your investments do not include infrastructure bonds, you will get tax rebate only on 1,00,000.

Example 1:
Ram makes the following investments:
1. PF  - Rs 40,000 (Employee contribution only)
2. PPF - Rs 20,000
3. Tax saving mutual fund - Rs 40,000
4. NSC - Rs 20,000
Total = Rs 1,20,000.
However, all these instruments come under the 1,00,000 limit, so Ram will get tax benefit on Rs 1,00,000 under section 80.

Example 2:
Shyam makes the following investments:
1. PF  - Rs 40,000 (Employee contribution only)
2. PPF - Rs 20,000
3. Tax saving mutual fund - Rs 20,000
4. 5 year bank FD - Rs 30,000
5. Infrastructure bonds - Rs 20,000
Total = Rs 1,30,000.
The first 4 instruments come under the 1,00,000 limit, so Shyam will get tax benefit on Rs 1,00,000 for first 4 investments + Rs 20,000 benefit for infrastructure bonds. So he will get tax benefit on a total of Rs 1,20,000.

Another point to note is that the maximum benefit above 1,00,000 with infrastructure bonds can be only upto Rs 20,000. So if you have already invested 1,00,000 in other instruments and your purpose is only tax-saving, then you should only invest a maximum of Rs 20,000 in infrastructure bonds.