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Tax Gains on Infra Bonds to Continue in this Fiscal

Banks likely to get access to this window as govt explores all means to boost funding

    The Union budget for 2011-12 could extend the tax benefit on investments made in infrastructure bonds by a year while giving banks access to this special window in an effort to raise debt funds for building physical assets of the country.


The last budget had allowed a deduction of an additional Rs 20,000 for investment in long-term infrastructure bonds, over and above the Rs 1 lakh limit prescribed for investments in tax saving schemes.


Only dedicated infrastructure companies or lenders were allowed to raise funds through these tax savings bonds.


Various options for infrastructure financing are being examined. extending this window is one of them.


The budget for 2009-10 had limited the tax benefit on infrastructure bonds for one year. This was because the government was hoping to roll out of the Direct Taxes Code from April this year.


But now that the new code is unlikely to be implemented before April 2012, the government could extend the tax relief on these bonds.


Keeping in view the infrastructure fund requirements of the country and also to make the to make the tax deduction more meaningful, the government should enhance the investment limit to Rs 50,000.


Infrastructure Development Finance Company (IDFC), IFCI and L&T Infrastructure Finance have already raised about Rs 5000 crore so far in the fiscal through these bonds. IDFC has already raised over Rs 1,200 crore in two tranches of its infrastructure bond issue in the current financial year.


The rate of interest offered on these bonds has been in the range of 8% simple interest per annum.


The tax-free infrastructure bonds have a minimum tenure of 10 years and a lock-in period of at least five years to ensure the much-needed long-term funds for the sector.
Investors can exit from these bonds only after five years in the secondary market if the bonds are being traded or go in for a redemption if they have opted for bonds that allow this option.


According to the planning commission, the sector would require $500 billion worth of funds in the 11th Five Year Plan ending in March 2012 and $1 trillion in the 12th Plan.
Equity funds are relatively easy to raise for long gestation infrastructure projects, but raising debt funds have been difficult in the absence of a vibrant debt market in India. Giving banks access to this window is another measure the government is thinking about. Bankers had sought this access in their pre-budget interaction with Finance Minister Pranab Mukherjee.


Banks have stepped up infrastructure lending, which has exposed them to asset-liability mismatch of providing long-term funds from deposits that usually mature in three to five year. There is a restriction on the amount lenders can raise through these bonds — a maximum of 25% of their incremental lending to infrastructure sector over the previous financial year.

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