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Extra tax benefits from long term infra bonds - Section 80CCF

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THE government of India in the Finance Bill of 2010 announced a tax relief on an investment up to Rs 20,000 in notified "long term infrastructure bonds" under Section 80CCF of the Income Tax Act, 1961 (the Act). The benefit, initially introduced for the financial year 2010–11, was extended to the financial year 2011–12 as well. The deduction under this section is over and above Rs 1,00,000 available to individuals under Section 80C of the Act for investing in provident fund, national saving certificates (NSC), life insurance premium, repayment of the principal amount of home loan to name a few.

An important point to note is that, while there are a large number of bonds available for individuals to purchase from the various financial institutions, only the notified long-term infrastructure bonds are eligible for deduction under Section 80CCF of the Act.

As notified by the government, these bonds can be issued by IFCI, LIC, IDFC, IIFC or a nonbanking finance company (NBFC) classified as an infrastructure finance company by the Reserve Bank of India (RBI).

It is mandatory for the individuals to furnish their PAN (permanent account number) to the issuer while investing in such bonds. Deduction under Section 80CCF through investments in tax-saving infrastructure bonds is available to individuals and hindu undivided families (HUFs) for the year in which the bonds have been purchased. There is no tax benefit from the next year onwards.

Taxability of interest: The fixed rate of interest income that individuals will receive on the notified long-term infrastructure bonds is taxable as `income from other sources' in the hands of the individual.  

Maturity of the bonds: As the name suggests, these infrastructure bonds have a `long' term maturity period not less than 10 years. The premium received at the time of maturity of the bond is liable to tax.

Some financial institutions selling the bonds offer a differential rate of interest depending on the lock-in period of lock-in period of the bond, that is, a longer lock-in period will result in a higher return for the bondholder. Individuals who do not have a liquidity pressure may choose to opt for the maximum I lock-in period of the bonds to enjoy the highest rate of interest.


Sale of bonds before maturity period: Even though the minimum tenure of a bond is 10 years, the minimum lock in period for an investor is five years. After the lock in period, the investor may exit either through the secondary market or through the buyback facility specified by the issuer in the issue documents at the time of the issue. In case, the investor sells the bonds before their maturity period, the provisions of capital gains shall apply on the same, as bonds fall under the purview of capital assets.

Keeping in view all the characteristics of the long-term infrastructure bonds stated above, they seem like a good investment option for in option for investors who are looking for a fixed and steady flow of income. While investing in bonds, be sure to read the offer document carefully, choose the lock in period and understand the other terms and conditions.

 

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Some of the best Tax Saving Mutual Funds available ( ELSS Mutual Funds )

  1. HDFC TaxSaver
  2. ICICI Prudential Tax Plan
  3. DSP BlackRock Tax Saver Fund
  4. Birla Sun Life Tax Relief '96
  5. Reliance Tax Saver (ELSS) Fund
  6. IDFC Tax Advantage (ELSS) Fund
  7. SBI Magnum Tax Gain Scheme 1993
  8. Sundaram Tax Saver

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