Infrastructure Bonds (Sec 80CCF) no more Tax Saving Instrument – FY 2012-13

If you were celebrating the tax cuts for next year (FY 2012-13) in Budget 2012, there is some bad news! Infrastructure Bonds would not be eligible as Tax saving instrument under Section 80CCF from FY 2012-13. 

What was the benefit?

Two years ago there was an additional deduction introduced to encourage investors to put money into infrastructure bonds. This consisted of bonds with a 5 year lock in and the maximum benefit for the year was restricted to Rs 20,000 of investments. The benefit was a deduction which meant that this amount of eligible investment was reduced from the taxable income of the individual.

The person in highest tax bracket would loose Rs. 6,180 while under 20% tax bracket would loose Rs. 4,120 and lowest tax bracket would stand to loose Rs. 2,060 in taxes due to Infrastructure Bonds being ineligible as tax saving instrument.

What has Changed in Sec 80CCF?

As they say that “Devil lies in the details”. The manner in which this section was structured was that this was applicable initial for just one financial year and this was later extended for one more financial year which meant that the benefit was available for the financial year 2010-11 and 2011-12. Now there is no mention in either the explanatory statement to the budget or in the part of the budget that makes the changes to the income tax act about any change in this particular section. What this actually means is that the term of the section has not been extended and that it will end at the end of March 2012.

Implications:

The implication of this is that the individual investor will lose the opportunity of this additional investment in the next financial year. This is a huge blow to them because this will actually push up their tax burden which will eat into the savings that they would have made due to the rise in the basic exemption limit. Take the case of a male person who has an income of Rs 6 lakh and they are using this benefit. The savings that they would have earlier got was Rs 2,000 on account of the rise in the basic exemption limit to Rs 2 lakh but a higher tax of Rs 4,000 due to the end of this benefit means that they are actually in a negative impact to the tune of Rs 2,000.

Investors should not confuse the increase in the permission given to institutions to raise additional amounts of tax free bonds with this particular benefit. Those are tax free bonds where the interest earned is not taxed while these are bonds that allow for deduction based upon the amount of investment in the bonds and the interest income earned here is taxable.