Infrastructure Bonds - Additional Tax Saving

Infrastructure Bonds or Tax-Saving Bonds is to save taxes as provided under Section 88 of the Income Tax Act, 1961. The two significant economic factors playing in the investment decisions of Infrastructure Bonds are Inflation and interest rate movements. For exmaple, price of a bond will fall if interest rates rise and vice-versa.

Infrastructure Bonds are available through ICICI Safety Bonds and IDBI Flexibonds. They can reduce tax liability by upto Rs 20,000 per annum, in addition to the 1,00,000 tax excemption provided under Section 80C. Infrastructure Bonds provide investors the option of purchasing and holding the instruments either as physical certificates or in the demat form. The Tax-Saving Bond from ICICI for the month of July 2001 provides two options:

• Face value of Rs 5,000 for 3 years at the rate of 9.00% interest payable annually
• Deep Discount Bonds with a face value of Rs 6,600. These bonds are available for Rs 5,000, and are issued for 3 years and 4 months, after which they are redeemed at their face value. These infrastructure bonds are suitable for an increase in the investment. The terms for the IDBI Bonds are similar also.

Apart from the above Infrastructure Bonds, Rural Electrification Corporation (REC) has come out with an issue of tax-saving infrastructure bonds for investors seeking to utilize the additional Rs 30,000 qualifying limit for investments in Infrastructure Bonds, India.

Infrastructure Bonds do not offer any protection against high inflation since the rate of interest they offer is pre-determined. Against Infrastructure Bonds by pledging them with a bank one can borrow from banks. The amount depends on the market value of the bond and the credit quality of the instrument. Moreover, it should be noted that although Infrastructure Bonds are considered to be safe, there is no assurance of getting the full investment back.