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More tax-free bonds on the anvil

The government's focus on infrastructure sector in this year's budget has opened up another investment avenue for investors.

twitter-logo Dipak Mondal        Last Updated: March 1, 2011  | 16:07 IST

The government's focus on infrastructure sector in this year's budget has opened up another investment avenue for investors. The Finance Minister, Pranab Mukherjee, has said that to boost infrastructure development public sector infrastructure companies would issue tax free bonds up to Rs 30,000 crore during 2011-12.

Of the proposed Rs 30,000 crore, Indian Railway Finance Corporation would issue bonds worth Rs 10,000 crore, National Highway Authority of India Rs 10,000 crore, HUDCO Rs 5,000 crore and Ports Rs 5,000 crore.

The interest income on such bonds is tax free. Usually, interest earned on corporate bond is taxed as per the income tax slab one fall into.

According to financial planners and industry experts, tax free bonds would be a good investment option for investors specially in the higher income tax slab.

"The attractiveness of the bonds would depends on the kind of yield they would offer," said Naval Vir Kumar, MD, IDFC Mutual Fund.

Karthik Javeri, a certified financial planner, said that going by the current interest rates scenario, if launched now the yield on bonds would be 8-9 per cent and these bonds would find enough takers.

If the yield on such a bond is 8 per cent, for a person in the highest tax slab (30%) the tax-adjusted return would be 10.4 per cent while for a person in the 10 per cent tax slab, the tax adjusted gains would be 8.8 per cent.

Meanwhile, the government extended the additional income tax deduction of Rs 20,000 on investment in long-term infrastructure bonds by another year. Thus, investments up to Rs 20,000 in long-term infrastructure bonds qualify for income tax deductions, over and above the Rs 1 lakh overall limit under Section 80C of the Income Tax Act. In the previous Budget, the government had announced the launch of this additional window of tax deduction.

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