Bonds - Infra bonds flavour of the day post-Budget

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This year's Budget has made tax-free infra bonds appealing to investors. Many such bonds may hit the market soon. Finance minister Pranab Mukherjee's announcement in the Budget that investors can park their funds in tax-free infrastructure bonds and avail tax benefits up to Rs.20,000 has sparked renewed interest. This would be in excess of the 1 lakh limit under Section 80C.

These bonds will become available as soon as the finance Bill is passed and the finance ministry notifies the provisions of the same. The finance minister also recently said that given that infrastructure spending is set to double to Rs 1,00,000 crore in the next five years, some banks and financial entities would be allowed to sell these tax-free infrastructure bonds. Earlier, only select state-owned companies were allowed to float these bonds. The tenure of the bonds is to be over 10 years.

This move to allow other institutions to issue infrastructure bonds is expected to help improve conditions in the long-term bond market, which is quite underdeveloped currently. Analysts say the interest rate for the bonds is expected to range anywhere between 8 per cent and 9 per cent. Earlier, state-owned firms used to raise money through these bonds at a lower rate of 6.5 per cent to 7.5 per cent. And, it was only popular among institutional investors. With the broadening of the issuing entities' list and the additional tax benefit, infrastructure bonds may turn out to be a preferred, low-risk avenue for saving taxes.

Source : Outlook Money

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