Bond financing is a sort of long-term borrowing that is widely used by state and local governments to raise funds, mainly for long-term infrastructure assets. This money is obtained by selling bonds to investors. In exchange, they agree to repay the funds, plus interest, according to predetermined timelines.
What happens when infrastructure bonds reach their maturity date?
As a result, the tax-advantaged long-term infrastructure bonds were not really tax-free bonds.
The annual interest payout option and the cumulative interest option were both available to the investors.
While investors who chose annual interest distributions have already paid tax on the amount of interest received, those who chose the cumulative option would pay more tax in the year of investment than they saved in the year of investment.
Confusion over Tax-Saving vs. Tax-Paying Infrastructure Bonds
Taxpayers who take advantage of free bonds end up paying more in taxes than they receive in benefits.
Taxation
Because the interest on long-term infrastructure bonds is taxable, the interest earned by the investors annually for those who chose the annual option and aggregate on maturity for those who chose the cumulative option will be added to their taxable income.
As a result, tax payable will be lower for investors in lower tax bands and higher for those in higher tax brackets.
TDS
For Resident taxpayers who choose the cumulative option in physical format, the interest payment will be subject to a 10% Tax Deducted at Source (TDS) if the interest payment upon redemption exceeds Rs 5,000.
The TDS rate will increase to 20% if the bondholder does not have a valid PAN or if the investor has not submitted his tax returns for the last two years and the total TDS and TCS in each of those years is Rs 50,000 or higher.
TDS of 31.2 percent would be applied to interest payouts for non-resident taxpayers.
How to save TDS
Resident bondholders must submit Form 15G / 15H, as appropriate, to avoid TDS. Those who did not disclose their PAN data at the time of investment must update their PANs with the various RTAs within the time frames set by the bond issuers.
Non-Resident bondholders must submit a tax officer’s order under Section 197 / 195 setting NIL / lower TDS rates to the appropriate RTAs before the deadline to guarantee that TDS is collected at the rates provided in the order.
Is infrastructure bond investing a good idea?
Infrastructure bonds are suitable for those that require a steady income. They provide a reasonable interest rate as well as tax advantages. These bonds typically have a 10- to 15-year maturity and a 5-year lock-in period before they may be bought back. These bonds are listed on either the National Stock Exchange or the Bombay Stock Exchange, and you can exit them after the lock-in term is through. A lock-in period is a period during which you are unable to sell a specific instrument.
A government or a firm needs to raise Rs 5 crore using tax-free bonds. Each bond has a face value of Rs. 1000. It plans to issue 50000 bonds. Ten years is the maturity phase. The minimum investment is Rs. 5000, which is equivalent to 5 bonds. You wish to invest Rs ten thousand rupees. If the interest rate, also known as the coupon rate, is 10%, your annual return is Rs. 1000. After ten years, you will have received a total of Rs. 20000.
Are infrastructure bonds a safe investment?
Brickwork Ratings has given IFCI bonds a ‘BWR AA-‘ rating, CARE has given them a ‘CARE A+’ rating, while Icra has given them a ‘LA’ rating. CARE and ICRA have given PTC India Financial Services a ‘A+’ grade. SREI infra bonds have a CARE ‘AA’ rating. Because the government owns REC and IFCI, there is a large margin of safety.
What is the procedure for redeeming infrastructure bonds?
Bonds are redeemed Registered bondholders relinquish their legally discharged bond certificates (by signing on the reverse of the bonds with a Revenue Stamp of Re. 1/-) on the date of maturity. The redemption record date is one month before the deemed encashment / redemption date.
How can I purchase infrastructure bonds in 2021?
If you have a demat account, you can apply to invest in an infrastructure bond online. You must complete an online application form.
These relationships can be applied for in a physical form. You’ll need a PAN card that has been self-attested. As part of the KYC (Know Your Customer) procedure, you must provide proof of identity and address.
After the lock-in period has expired, these bonds can be exchanged on stock exchanges like stocks.
How much does infrastructure bond interest cost?
The majority of recently issued infrastructure bonds have a coupon (interest rate) of 7.5 percent to 8.25 percent. The IFCI’s second series of bonds, which were just completed, carried a coupon of 8% with a five-year repurchase option and 8.25 percent with no buyback option.
Are infrastructure bonds tax-exempt?
When it comes to tax-advantaged investments, infrastructure bonds are among the best. These bonds are issued by infrastructure businesses after they have been approved by the government. The bonds’ tax benefits, as well as their attractive interest rates, have led to their growing popularity among investors. Infrastructure bonds qualify for income tax deductions up to Rs.20,000 under Section 80C of the Income Tax Act, although the ceiling is higher than the Rs.1 lacs deduction that individuals can claim under Section 80C because they are long-term secured bonds that expire in 10 to 15 years.
PFC and IFCI Ltd. have just stopped issuing infrastructure bonds, while others, such as L&T Infrastructure, LIC, India Infrastructure Finance Company, and Infrastructure Development Finance Company, are preparing to do so.
Which investment is the best for senior citizens?
It is one of the most popular and well-liked retirement plans in India. It’s a good scheme for retirees because it provides security and a steady income with no risk. In addition, the 7.4 percent annual interest rate it gives is among the best in the industry. This position can only be held for a maximum of 5 years. The scheme is supported by the Government of India (GOI), making it a secure place to put your money. The GOI first implemented it in August 2004, with senior citizens at the forefront.
Interest
Debt instruments such as bonds are a sort of debt instrument. When you purchase a bond, you are essentially lending money to the government or firm that issued it in exchange for interest. Over the course of their lives, most bonds pay a fixed, predetermined rate of interest.
That interest income could be taxed or not (more on the types of bonds that generate tax-free income later). In most cases, if the interest is taxable, you must pay income taxes on it in the year you receive it.
Bond interest is calculated at the same rate as other types of income, such as wages or self-employment earnings. There are seven different tax brackets, ranging from 10% to 37%. If you’re in the 37 percent tax bracket, your bond interest will be taxed at the same rate as your federal income tax.