The finance minister has probably sounded the death knell for infrastructure bonds with the introduction of Section 80C.
Until the previous year, individuals could invest up to Rs 30,000 per annum exclusively in infrastructure bonds as a part of their Section 88 investments. Under Section 80C, this limit is gone and investors now have much needed flexibility in planning their investments (overall limit is set at Rs 100,000). Not surprisingly, most probably will give the infrastructure bonds a miss.
It is not hard to figure out why. With a likely return of about 5.50%-5.75% per annum for a three-year lock-in debt instrument, the infrastructure bond scores poorly when compared with the other alternatives. Indeed, as discussed earlier, alternatives other than tax-plan mutual funds have tenures which exceed three years.
But then the difference in returns is so significant that it cannot be overlooked. It is important to note that this likely return from infrastructure bonds is taxable, and therefore the post-tax return will actually be much lower.
Table 1|
Tax rates |
Post-tax returns* | |
|
Nil |
5.50% |
5.50% |
|
10% |
5.50% |
4.94% |
|
20% |
5.50% |
4.38% |
|
30% |
5.50% |
3.82% |
If one were to compare the infrastructure bonds with the tax-plan funds (lock in tenures are same at three years), it clearly emerges that individuals who can take on risk should go in for the latter.
Personalfn expects the broader market to return 15% CAGR over the next three years; the attractiveness of this return increase when one factors in that there will be no tax implications on the dividend received and capital gains tax earned.
The infrastructure bond may however hold appeal to those investors who are not willing to expose themselves to any risk and at the same time are looking to get their money back as early as possible.