Tax Saving Infrastructure Bonds (Long Term) Facts

New Section 80CCF of the Income tax act is added for FY 2010-2011 for tax saving. So, you can invest Rs.20, 000 in addition of 1 LAC of Section 80C and save tax based on tax slab.
Your income tax slab    your immediate saving
                10%                     2000
                20%                     4000
                30%                     6000
The Infrastructure bond’s tenure and interest rates are not declared by the finance department by govt. of India.

Understand most important facts before taking for Infrastructure Bonds.
1) The interest rates are typically very less compare to other products. Generally it’s around 5.5% to 6%.
2) Do not forget, its long term infrastructure bonds. So, the lock in period would be 5 to 7 years.
3) The effect of inflation rate on your long term investment would be very high. Assume you are getting 6% for 5 years on these bonds when the current inflation rate is more than makes your investment useless.
4) The impact of EET (Exempt- Exempt-Tax) concepts of purposed Direct Tax Code (DTC) on any investment from 1st APR’11.It means your returns will be taxable at the maturity at your applicable tax slab.
5) Consider, you do not invest Rs. 20,000 in infrastructure bonds. You are investing the remaining money after deducting tax into some Mutual Funds or stock market. You will get better returns in long term for sure.

So, I consider Rs. 20,000 is invested at 6% interest rate for 5 years for tax slab of 10%.
Your investment (A) =20,000
Your initial tax saving (B) = 2000
Your interest (CI) amount after 5 years at 6 %( C) = 6765
Your returns (A+B+C) =28765
If Tax deducted at 10% on interest amount based on DTC (D) = 676
Now, Your effective returns (A+B+C-D) =28089.

If you invest Rs. 18000(A-B) in mutual funds or stock market instead of infrastructure bonds .If I assume 12% CAGR for 5 years then your returns will be Rs.31722(18000+13722) and effective returns will be Rs.30350 (31722-13722).

If you are in tax slab of 20% and 30% then your initial saving will be high.calculate your effective saving based on above calculations to check the impact on investments.

So, don’t be hurry in getting your long term infrastructure bonds for year 2010-2011.Wait, analyse and calculate when all the details are available in front of you.