A few days back, the government moved ahead with the infrastructure bonds that it had announced in this year's union budget. The bonds will offer Rs 20,000 worth of tax exemption over and above the existing limit of Rs 1 lakh. This is the first significant addition to the roster of tax-exempt investments in a long time. A lot of the real value of the Rs 1 lakh exemption has been eaten away by inflation in the decade or so that it has been around and the addition of Rs 20,000 will be welcome by all tax-payers. One can unhesitatingly expect the limit to be utilised fully. That is, practically every tax payer will make this investment and the investment inflows under this scheme will be huge.
However, these bonds also raise some questions. One is that they seem to go against the direction on which the Direct Tax Code is based. The idea behind income tax reforms is supposed to be that the structure should be simplified and specific exemptions should not be made. This implies that individuals should have a pool of savings available and they should be able to pick and choose according to their own needs. Directing specific amounts to specific needs is a regressive idea. It's a throwback to the days before section 80C was effectively combined into a single pool of Rs 1 lakh.
The other potential issue is that investors will have to clearly judge the creditworthiness of the bonds they are investing in. While institutions like IFCI, LIC and IDFC, which are some of the ones allowed to issue these bonds, will effectively have government guarantees, similar bonds will also be likely issued by other entities, including private corporate entities. Tax-saving bonds that don't carry government backing is a new kind of animal, something which ordinary tax-payers are not exactly used to. Combined with the long 10-year tenure and the five-year lock-in of these bonds, it will mean that the continued creditworthiness of the bond issuers is something that both the government as well as investors will have to keep an eye on.
