For the Inquisitive Investor Certain FAQ’s on 80 CCF & Infrastructure Bonds
What is section 80 C?
Sec 80C of the Income Tax Act is the section that deals with tax exemptions for Individuals and Hindu Undivided Families (HUF). It states that qualifying investments, up to a maximum of Rs. 1 Lakh, are deductible from your income.
What are Qualifying investments under Sec 80C?
Life Insurance Premiums, Payment for non commutable deferred annuity/deferred annuity, Statutory Provident Fund (PF), Recognized Provident Fund, Public Provident Fund (PPF): ,approved superannuation fund, National Savings Certificate (NSC), Unit Linked Insurance Plan, Equity Linked Savings Scheme (ELSS), Notified Pension Funds, Interest paid on Home Loan, Stamp Duty and Registration Charges for a home, tuition fees for any two children, approved debentures of and equity shares of public infrastructure company, Bank Fixed Deposits: having a maturity of 5 years or more, Senior Citizens Saving Scheme, notified bonds of NABARD, 5 Year Time Deposit Scheme in Post Office.
Can I save more tax if I have already utilized the entire Rs1 lakh benefit under Section 80C?
Yes you can. The budget has introduced a new section 80 CCF which allows you to save more tax.
What is section 80 CCF?
In tune with the policy thrust of promoting investment in the infrastructure sector, it was proposed to insert a new section 80CCF in the Income-tax Act to provide that subscription during the financial year 2010-11 made to long-term infrastructure bonds (as may be notified by the Central Government), to the extent of Rs. 20,000, shall be allowed as deduction in computing the income of an individual or a Hindu undivided family.
This deduction will be over and above the existing overall limit of tax deduction on savings of upto Rs.1 lakh under section 80C, 80CCC and 80CCD of the Act.
Which are the companies authorized to come out with this kind of bonds?
IDFC, IFCI and LIC & LNT are some of the currently authorized entities which can issue this kind of bonds.
Assuming an investor is in the highest tax bracket, how much more tax does he save?
In the highest tax bracket he shall save tax close to Rs 6100.
What will be the coupon, coupon payment frequency and tenure of the bond?
The tenure of the bond shall be anywhere between 5-10 years with an option for the investor to surrender for buy-back (commonly known as put option) after minimum of 5 years.
What are the supporting required while filling the application?
Any investor having a PAN and a Demat account can subscribe to this bond. Please mention the PAN & demat details in the application form and attach a self attested PAN copy along with the application. Some bonds will also allow physical form in t hose case address proof need to be submitted which should be self attested along with PAN card copy.
What if an investor wants to invest more that Rs 20000?
The investor is free to do so. He can invest any amount of his choice. But the tax benefit shall pertain only to amount equivalent to Rs 20000. For eg: if an investor invests Rs1 lac, he shall get the coupon interest for Rs1 lac but tax benefit only for Rs 20000.
If an investor saves tax as he invests, does the effective yield on the bond increase?
Yes it does. For eg: If an investor in the highest tax bracket invests Rs 20000, he gets a tax deduction of Rs 6137. This would mean that his net outflow is only Rs 13863. The money shall grow from an initial investment base of Rs 20000 whereas his real investment shall be only Rs 13863. This translates to a pre tax yield of more than 12% for the investor investing in the bond for 10 years in the cumulative option.
Can an investor sell or pledge this bond?
Yes. You can pledge and sell this bond but only after 5 years. This can be done on the exchange and this is the reason, Demat account has been kept mandatory. Trading on this bond shall start from the 5th year.
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