Budget 2010-11: Additional deduction for individuals in

respect of long-term infrastructure bonds under section

80CCF of Income-tax Act
Feb 27, 2010 Budget 2010

In tune with the policy thrust of promoting investment in the

infrastructure sector, it is proposed to insert a new section
80CCF in the Income-tax Act to provide that subscription during
the financial year 2010-11 made to long-term infrastructure
bonds (as may be notified by the Central Government), to the
extent of Rs. 20,000, shall be allowed as deduction in computing
the income of an individual or a Hindu undivided family. This
deduction will be over and above the existing overall limit of tax
deduction on savings of upto Rs.1 lakh under section 80C,
80CCC and 80CCD of the Act.
This amendment is proposed to take effect from 1st April, 2011
and will, accordingly, apply in relation to the assessment year
2011-12.

Govt allows banks to raise tax-

free infrastructure bonds
By Manju AB Mar 02 2010
Tags: Banks, Infrastructure bonds, Stock Market

Banks will be allowed to raise tax-free infrastructure bonds after they

take government permission
to notify the bonds under the infrastructure bond category. The finance
ministry has told banks that they would be allowed to issue
infrastructure bonds provided the proceeds of the issue is utilised only
for infrastructure development.

However, the reserve requirements of cash reserve ratio (CRR, or

slice of deposits that banks maintain with RBI) and statutory liquidity
ratio (SLR, or investment in government securities) may not be lifted
for these bonds.

This will incentivise ban-ks to launch retail bond issues as they need
long-term funds to finance large infrastructure projects. The bud-get
has proposed raising of the tax exemption level for individuals from
the present Rs 1 lakh to Rs 1.20 lakh, where the additional Rs 20,000
will be on investments in infrastructure bonds. State Bank of India, for
example, had plans of a retail bond issue of over Rs 5,000 crore,
which may be launched after the latest tax incentive from the
government.

This may see a number of infrastructure bond issuances from banks,

provided the government guidelines are beneficial to banks. Public
and private sector bankers said “this is equivalent to getting the
freedom to raise tax-free bonds, but we are awaiting the government
guidelines on these bonds.”

“Permission will be mandatory each time a bond issuance happens.

The tenure of the bond and the rate of interest will be the discretion of
the bank, but the government may put caveats so that the money
goes into infrastructure development. This will be for around six to
eight years and the interest rate will be higher than the fixed deposits
as it would be of longer term in nature,” said bankers.

IDBI and ICICI Bank issued infrastructure bonds earlier, but the
income tax benefit for investing into these bonds were withdrawn three
years back.

Some of the popular infrastructure bond issuances include the ICICI

safety bonds from ICICI Bank, the IDBI flexi bonds (for investments of
Rs 1,00,000 lakh) from IDBI, and the India Infrastructure bonds. All
these bonds had lock-in of three years. “Though banks were not given
a blanket permission to launch infrastructure bonds, they can now
issue bonds and get it notified from the government for the tax free
status,” said a senior private bank official.

Each bank will have a limit to which it can raise these bonds based on
their balance sheet. The Reserve Bank of India and the government
will monitor the infrastructure portfolio of each bank to see if the
money has flown into the sector. Infrastructure bonds were a long-
standing demand from the banks. Banks generally have short-term
resources of one year through fixed deposits or bulk deposits and the
infrastructure financing is long term in nature. So lending to the sector
would create asset liability mismatches.

FEB
Infrastructure bonds: Some caveats
The budget this year was a low-key affair, at least from the political
arena, it is just the petrol prices that is causing some stir. So apart
from the tax slab changes, that brings more money into pockets of
salaried employees, there is additional tax saving investment avenue
that is proposed in this year’s budget i.e. infrastructure bonds.

What is announced?

The government has allowed a deduction of up to Rs 20,000 on

investments in long-term infrastructure bonds. The deduction is in
addition to the Rs 1 lakh allowed under Section 80C of the Income
Tax Act.

What are infrastructure bonds?

These are bonds issued by government and the fund collected is

utilized to bolster the infrastructure projects

What is the income tax section under which deduction can

be claimed?

The investment of upto Rs 20,000 can be claimed under section

80CCF.

How much can I save?

Not much and here is the caveat, the maximum investment that can be
claimed for deduction is Rs 20,000 and if you fall in the maximum tax
bracket of 30%, then the maximum you can save is just Rs 6,180 in a
year.

Is this a new great thing done by the Finance Minister?

Not really, the tax deduction for investment in infrastructure bonds

was available till 2005 under section 88 (but within the limit of 1
Lakh), but 2005 budget scrapped individual investment limits and
created section 80C where you can invest in any tax-saving avenue in
any proportion. The only new thing here is that now, the investment in
infrastructure bonds is in addition to the section 80C exemption.

Why it is added back with such a small limit?

Well, here is another caveat. The infrastructure bonds are a low-risk

investment and hence does not yield very high returns (7-8%). So with
stock market showing master-blaster performance, most people
started investing in equity linked saving schemes and the investment
dwindled in the infrastructure bonds. This step is probably to bring
back the interest in these bonds.

What are the other caveats?

1) It is still not clear if the private companies will be allowed to issue

these infrastructure bonds.

2) The budget mentions that only “long-term” investment in

infrastructure bonds quality for tax-break, but fails to define the “long-
term”
3) The interest earned from these bonds is not tax-free (the older
section 80L, which provided such tax-free interest had already been
scrapped earlier)

4) The interest earned from these bonds may not be anywhere

spectacular, due to it being a less-risky investment.

What do you suggest?

So, it may not be prudent to invest Rs 20,000 for “long-term”, which

provides you a return of mere 7-8% interest rate (with taxable
interests) with providing just a meager tax-saving of Rs 6180 per year.
I would suggest a wait and watch policy, till the clouds get cleared on
this new announcement. Since anyway the investments will only
qualify from next-year onwards.

Thu, Mar 25 10:50 AM

FM Pranab Mukherjee said on Tuesday that he will consider tax-free

status for bonds floated by non-banking finance companies (NBFCs) or
other private financial institutions (PFIs) to fund infrastructure projects.
The estimated deficit in financing for core infrastructure projects in the
11th Plan (2008-12) is estimated to be about Rs 7,50,000 crore. This
deficit is equal to around 35% of the investment planned in the
infrastructure sector during the period. It seems that the FM's 'grant' is to
take care of the impending shortfall in funding. Let's try to understand
the merits of financing infrastructure projects through tax incentivised
bonds.
 One of the key roles of the government is to facilitate infrastructure
development, which raises living standards, improves long-run
productivity and also bolsters the economy. Broadly defined,
infrastructure includes roads, power, airports, railways, irrigation,
drinking water, etc, for public use. Building infrastructure costs a
substantial amount of money and the monetary returns on these
investments accrue over a fairly long period of time.

One way to fund infrastructure development is to facilitate public capital

accumulation through NBFCs and PFIs. The government has set an
ambitious target of investing Rs 22.5 lakh crore in infrastructure during
the 11th Plan period. In the first two years of the 11th Plan, many
tendered public-private partnership (PPP) projects did not find bidders
due to viability concerns. A major reason the projects were not viable is
the low returns on these projects vis-à-vis the cost of capital.
Exemption of taxes on infrastructure bonds would mean lower interest
rates paid to investors by NBFCs and PFIs who, in turn, will provide
low-cost financing for these projects, thereby making them more viable.

In a way, the FM is trying to provide subsidy to the infrastructure sector.

The only difference is that instead of giving a grant or a direct subsidy,
the FM is providing an indirect subsidy through tax exemption. So,
effectively, what the FM is saying is that if you lend money for
infrastructure projects to NBFCs, the interest paid to you on the bond
would be tax exempted. If the government does not take a share from
your interest income, as an investor you would be happy with a lower
interest rate from the issuer. The government loses out on the tax
revenues. The tax exemption clause helps the NBFC and PFIs tap public
savings that would have otherwise reached other intermediaries like
banks or mutual funds.

The problem is not that the FM wants to subsidise the infrastructure

sector-I believe he should-but that this is not the best way to go about it.
While the government would forgo tax collections each year, NBFCs
and PFIs would receive only two-thirds of this 'subsidy'. The remaining
 one-third would be picked up by the high net worth investors who
ideally shouldn't receive any tax benefits.

Let us understand why not all the 'subsidy' would reach the NBFCs and
PFIs and eventually the infrastructure developers, and how a good
proportion of this subsidy would be shared by the investors. Consider
the last popular tax savings bonds that were issued by RBI in 2003.
These were five-year bonds bearing a coupon of 6.5%. An equivalent
five-year taxable bond then yielded 8%. Assuming a marginal tax rate of
30%, a taxable 8% bond means that an investor makes effectively 5.6%
post tax, i.e. he ends up paying 2.4% (30% of 8%) to the government as
taxes. However, with a tax-saving bond, the coupon is 6.5%. Of the
taxes (2.4%) that the government forgoes, more than one-third (0.9%) is
held back by the investor. Another downside to this is that if you allow
high-income taxpayers to avoid taxes, it doesn't do a world of good to
the already low tax discipline in the country.

Rajiv Lall, CEO, Infrastructure Development Finance Co, suggests that

the government should allow insurance and pension firms to buy debt
paper of infrastructure focused NBFCs, instead of allowing tax-free
private sector bonds. I think it is a good suggestion. In other industrial
countries with good infrastructure, pension funds are often active
participants in infrastructure financing. Of the ten largest pension funds
in the world, six are public pension funds, and all six are strong players
in infrastructure investment. The message is clear. If public pension
funds have the opportunity to invest in infrastructure, they do so,
sometimes quite extensively. They would recognise it is a good
investment that also responds to the needs of a growing economy.
Likewise, insurance firms tend to have long dated liabilities. Having
long dated infrastructure bonds would be a good fit for the asset liability
management of their balance sheet. Both insurance and pension firms
will have higher funds available in the future as the country has a young
demographic profile. Tapping those resources would be more prudent
than creating tax deviations through exemptions. Personally, as an
investor, I would welcome the FM's suggestion. However, I am not sure
if it is the best thing for the government.

The author, formerly with JPMorganChase, is CEO, Quantum Phinance

o Facebook

Wed, Mar 24 09:31 AM

The government may allow private sector companies to raise funds by

floating long-term infrastructure bonds that will be tax-free. This will be
similar to what specified government-owned institutions or select public
sector undertakings (PSUs) are allowed to do today.

Addressing a conference organised by the Planning Commission on

Building Infrastructure, Finance Minister Pranab Mukherjee said, "It
(proposal to issue long-term infrastructure bonds) will of course be for
the private sector as well as the public sector."

As a measure to promote savings, he had, in Budget 2010-11, allowed

individuals to invest an additional amount of Rs 20,000 (over and above
the Rs 1 lakh ceiling on tax saving instruments) in long-term
infrastructure bonds.

While Finance Ministry officials were not immediately available for

comment, sources in government-owned financial institutions such as
IIFCL that float such bonds said the government was likely to identify
institutions - banks or even companies in the private sector - that may be
allowed to tap this window for fund raising.

"In the case of bonds floated by IIFCL, the entire investment is treated
as a deduction from income for tax purposes. However, what the
 Finance Minister said today is subject to the enhanced ceiling of Rs
1,20,000 per individual," an IIFCL source said.

Private players such as L&T have in the recent past raised funds for
infrastructure projects but investors do not get any tax benefits.
Economists who did not wish to be quoted said granting tax-free status
to companies or banks in the private sector was tantamount to distorting
the tax regime.

"While on one hand the proposed Direct Tax Code seeks to do away
with all exemptions, this move is retrograde," said an economist.

The Finance Ministry is, however, likely to identify sectors for which
money could be raised through such instruments. In the case of banks
though, there will be tighter monitoring as they would have to abide by
the cash reserve ratio (CRR, or the portion of deposits that banks
maintain with RBI) and statutory liquidity ratio (SLR, or investment in
government securities).

State Bank of India recently indicated that it plans a retail bond issue of
over Rs 5,000 crore. In the past, IDBI Bank and ICICI Bank have issued
infrastructure bonds, but the income-tax benefit for investing in these
bonds were withdrawn three years back.

Mukherjee today said that long-term infrastructure bonds entitled for the
benefit would be notified by the government later. Noting that funding
was a major constraint, he said, the decision will help in augmenting
resources of public as well as private sector for developing the country's
infrastructure.The investment requirement for the infrastructure sector
was pegged at $500 billion during the Eleventh Plan (2007-12) and is
expected to double to over $1 trillion in the Twelfth Plan (2012-17).

Topics:
 Private banks
Tax free bonds

NEW DELHI: India’s private banks and non-banking finance companies

(NBFCs) appear set to join a list of select stateowned firms which will
be
allowed to offer tax-free bonds to investors, as
the government seeks to broaden its avenues to
raise long-term funds to build more roads,
ports and power plants. The country will need over a trillion dollars over
the Twelfth Plan period (2012-17 ) to improve its infrastructure.

Finance minister Pranab Mukherjee said that given the constraints in

financing key projects, the government has decided to open up the
window for issuing tax-free infrastructure bonds to private firms also. So
far, only state-owned companies were allowed to issue such bonds.

In this year’s Budget, Mr Mukherjee has proposed that investors could

put money in tax-free infrastructure bonds over and above the ceiling of
Rs 1 lakh for specific investments such as in the public provident fund
and equity-linked savings schemes. Investors who park funds in the
proposed infrastructure bonds will get a tax break of Rs 20,000 annually.
However, the bonds are expected to have a long tenure in excess of 10
years.

Private sector banks and NBFCs, particularly those providing finance to

infrastructure sector, may be among the beneficiaries of the latest move,
a finance ministry official who did not wish to be named told ET. The
Indian central bank, or the RBI, recently introduced a new category of
NBFCs — ‘Infrastructure Finance Companies (IFCs)’ which will be
largely lending to the infrastructure sector. These specialised NBFCs are
tipped to be the first off the block in this bond issuance. The cost of
funds raised through infrastructure bonds is low, as the rate of interest
offered is low, but the effective return to investors is high because of the
tax benefits.

A NUMBER of governmentowned entities have issued tax-free bonds at

7.5%. If a private sector entity floats such bonds, the cost could work
out to 8-9 % which is still lower than raising money from banks at close
to 11%,” said Vishwas Udgirkar, executive director at consulting firm
PricewaterhouseCoopers.

In the early half of the decade, infrastructure bonds were a hit with
investors, but changes in laws in Budget 2005-06 made them less
attractive and practically killed the retail market for such bonds which
was worth Rs 15,000-20 ,000 crore then. In a way, Mr Mukherjee
appears to be reversing the policy pursued during the time of his
predecessor, P Chidambaram, when tax-free bonds were discouraged.

Institutions such as the state owned Rural Electrification Corporation

were regular issuers, earlier managing to raise funds at 6% rate. Only
institutions like the government-backed IFCL now issue tax-free bonds
that are picked up by institutional investors.

The Budget announcement was in keeping with the demand of banks

that sought access to such bonds to lend to the infrastructure sector.
Infrastructure projects, typically, need debt for 15-20 years, but banks do
not have access to long-term funds, as the deposits they raise are of
shorter duration.

Banks can raise five-year deposits that are eligible for tax deduction .
The benefit will be available to taxpayers after the passage of the
finance bill and subsequent notification of the provision by the finance
ministry. The move to allow private players to issue infrastructure bonds
will also help in the development of a long-term bond market that now
lacks both depth and liquidity. However, experts said this may just be
the first step, and more measures would be required to generate retail
interest.

“Infrastructure sector is stretched for capital and this move will open one
more big avenue for borrowers to raise fund from retail . To create
appetite for such bonds and deepen the market, these bonds could be
sliced into two categories based on their level of risk. One category
could be to raise funds to finance new projects and other one by
securitising cash flows from existing infra projects which will be more
secure,” said Jai Mavani, head, real estate and construction, KPMG.
Deepening of the bond market will require more participation from
pension funds, said experts, something which the finance minister did
not lose sight of on Tuesday.

Section Existing Proposed Increase

80CCF subscription to long nil 20,000 20,000
term notified infrastructure
bonds

Tax-free core bonds from private banks

Tax deduction of Rs 20,000 p.a. under Section 80CCF for
investment in long-term infrastructure bonds.

As the Government seeks to broaden its avenues to raise long-

term funds to build more roads, ports and power plants, it will
require over a trillion dollars over the twelfth 5 yr plan period
(2012-17) to improve infrastructure.
Finance minister, Mr. Pranab Mukherjee has said that given the
constraints in financing key projects, the Government has decided
to open the window for issuing tax-free infrastructure bonds to
private firms as well. So far, only state-owned companies were
allowed to issue such bonds. This will thus lead to India’s private
banks and Non-Banking Financial Companies (NBFCs) joining
the list of select state-owned firms to offer tax-free bonds to
investors.

In this year’s Budget, the Government has also provided for a tax
deduction of Rs 20,000 p.a. under Section 80CCF for investment
in long-term infrastructure bonds. This is over and above the
existing limit of Rs 1,00,000 p.a. under Section 80C of the Income
Tax Act.

Such bonds offer a lower rate of interest than fixed deposits, but
the effective return to the investors is higher because of the tax
benefits.

We believe that such a move will provide a fillip to infrastructure

finance and provide an opportunity to individual tax payers to
reduce their tax liability. It will also facilitate the development of a
long-term bond market.