Understanding Tax Saving Bonds

For the year 2012-13 there is no provision for income tax rebate under section 80 CCF for investing in Infrastructure Bonds. Read on if you would like to know about them.

Concept

The government promotes retail investment in Infrastructure Bonds in order to fund various infrastructure projects in the country. Infrastructure projects such as building National Highways, Power Projects, Ports, and Railways, to name some are long term projects lasting for many years. Through Infrastructure Bonds investors' savings are channelized directly to funds infrastructure projects.

In April 2010 a new section 80 CCF of the Income Tax Act was introduced which offered rebate of up to Rs 20,000 for investing in these bonds which is over and above the Rs 1 lakh deductions available under section 80 C. Tax saving infrastructure bonds are not new in India. Earlier deduction of up to Rs 30,000 was allowed for investing in these bonds under section 88 which was later scrapped.

For deduction under 80 CCF the bonds needed to have maturities greater than 10 years and a minimum lock-in period of 5 years. After the lock-in period you could sell those in the secondary market or through buyback (if option exists) or you simply hold them to maturity. The bonds could be used to pledge for loans from specific banks after the lock-in period.

Infrastructure bonds are issued by LIC, IDFC, IFCI and Infrastructure Finance Companies like PFC, PFS, REC, etc. Usually they are issued in the final quarter of the financial year from January to March. Investors could purchase them in that time at the face value and receive coupon payments at specified intervals. Coupon rate is the interest rate calculated on the bond's face value.

Investing in them

Every infrastructure bond issued by an Infrastructure Finance Company is to be rated by two credit rating institutions for their credit quality. Different credit rating institutions use different symbols to depict risk profile of the bond. Bonds are safest instruments to invest in. Yet investing in a poor quality bond can risk default of payment.  

The rating symbols and their definitions followed by rating agencies such as CRISIL, ICRA, CARE for bonds are tabulated below:

Definition (CRISIL & CARE)

Rating Symbol (CRISIL & CARE)

Definition (ICRA)

Rating Symbol (ICRA)

Highest Safety

AAA

Highest Credit Quality

LAAA

High Safety

AA

High Credit Quality

LAA

Adequate Safety

A

Adequate Credit Quality

LA

Moderate Safety

BBB

Moderate Credit Quality

LBBB

Moderate Risk

BB

Inadequate Credit Quality

LBB

High Risk

B

Risk-prone Credit Quality

LB

Very High Risk

C

Poor Credit Quality

C

Default

D

Lowest Credit Quality

D

 

 

 

 

 

 

 

 

 


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