Saturday, January 8, 2011


Jan-Mar months are those in which very rampant tax planning takes place, especially among the salaried class and i'm no different. I have used up all sections available for tax saving except for the new section ( 80 CCF) introduced in last budget - Tax free investment upto 20,000 made in Infrastructure Bonds.In the past i have shown least interest towards dept instruments and all my investments are in Equity instruments.Thought of checking infra-bond's usability for tax planning and hence this post.

On a random check one the net came across the following deposit open
IFCI 8% pa 5 years lock-in period (opion2)

Some similar funds
L&T infra 7.5% 5 years lock-in period ( scheme closed for investment now)

PFC & IDFC are will open for subscription in the later part of January

At a first look these interest rates ie) around 8% looks minuscule in comparison with inflation rate of 5-6% and food inflation of 15%. But we need to take the income tax saving also into consideration.Following illustration holds good only for a individual falling under 30% tax bracket .

Investment : Rs20,000
Repayment : Rs29,386 ( at the rate of 8% the end of 5 years)

Incase if you dont make this investment , you need to pay a tax of Rs 6180 on Rs20,000. So the picture changes considering the tax saved as follows

Effective Investment : Rs13,820
Repayment : Rs29,386
Effective interest rate : 16.29% ( after considering tax savings )

The interest payment at the end of 5 years is taxable at the hands of the receiver.

Effective Investment : Rs13,820
Repayment : Rs29,386 - 9,386 * (30.3/1000) = Rs 26486
Effective interest rate : 13.89% ( after considering tax savings & tax payment on interest)

Risk free interest rate of 14-16% that too from a PSU is a compelling argument.

Some more advantages :

1. These FDs are listed and can be hold in demat form . No more hassles of maintaining all documents
2. TDS is done only when interest paid exceeds Rs 10,000.In this case its Rs9,386.
3. As there is no other options under Sec80CCF there is no comparison possible.

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