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After the additional Rs. 20000 investment in Infrastructure Bonds are allowed as deduction under Section 80C, above the cap of Rs. 100,000/-, suddenly the tax payers see it as a brighter option to save more tax.  But, on careful & tactical analysis one can figure out, whether it is a healthy investment option for them or not.


Infra Bonds are Government Bonds & are available in the debt market. It carries highest security and is invested for long term. It is like a debt instrument which pays a periodic/fixed interest which normally doesnt change very often.

 

Before selecting this as a tax saving instrument, one must do some home work calculations. One must consider any tax saving investments on few parameters, such as :

  • Tax saving
  • Lock in period for the invested funds
  • Returns from the investment
  • Lost opportunity to earn, if invested in some other option.

 

Tax saving

Tax saving will be different for different slab group taxpayers.

For 10 % Group            : Saving is Rs 2,000/- (20000*10%)

For 20 % Group            : Saving is Rs 4,000/- (20000*20%)

For 30 % Group            : Saving is Rs 6,000/- (20000*30%)

 

Lock in period for the invested funds

Normally these instruments comes with 5-10 year lock-in period. For our calculation let us suppose it @ 5 years.

 

Returns from the investment

Normally these instruments fetch 7-9 % per annum. Let us suppose it @ 8 %. So with an annual compounding factor an investment of Rs. 20,000/- would return an interest of Rs. 9,387/- over its lock-in period. So total returns works out to :

Tax Slab Group

Net Return in 5 years (including tax saved in year 1)

Net Average Return

For 10 % Group            :           

2000 + 9387 = Rs. 11387

                        11.4 %

For 20 % Group            :           

 4000 + 9387 = Rs. 13387

                        13.4 %

For 30 % Group            :           

6000 + 9387 = Rs. 15387

                        15.4 %

 

Lost opportunity to earn, if invested in some other option.

 

Instead of the above if the same amount has been put in an ELSS scheme, even the most conservative fund will give a return of 12-18 %. Let us suppose it @ 15 %. First of all, one must understand, that if we are not going for investment in full 20,000/-. They will have lesser amount to invest in ELSS :

           

Tax Slab Group

Amount left after Tax paid in year 1

Net Return in 5 years (after deducting tax paid in year 1)

Net Average Return

10 %

18000/-

16204/-

@ 18.0%

20 %

16000/-

12182/-

@ 15.2%

30 %

14000/-

6956/-

@ 11.7%

 

So now, if we simply compare the two scenario i.e Net return if invested in tax saver infrastructure bonds vis--vis Net return if not opted for this option & instead opted for some other safer scheme.

 

Tax Slab Group

Net average Return (Infra Bonds) 

Net average Return  (Other funds)

Conclusion

(Better Option)

10 %

11.4 %

18.0%

Other Funds

20 %

13.4 %

15.2%

Other Funds

30 %

15.4 %

11.7%

Infra Bonds

 

 

 

Bottomline.

 

If you are in the highest tax bracket (30%) then these infrastructure bonds are definitely a worthy decision.


If you are in the medium tax bracket (20%) then you should not go for this long term option. If its available with a lesser 2-3 year lock-in, they one may think of opting for this.

 

If you are in the lowest tax bracket (10%) then its a BIG NO





Category Income Tax, Other Articles by - CMA. Subhash Kumar Jha 



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