February and March are the most active months when it comes to tax planning as this is the time of the year when most of us look at investing in tax-saving schemes. Tax is such a dreaded word that it makes both the rich and the poor dance to its tunes. In tax calculation, earning is directly proportional to the amount you pay as taxes.

During every tax season, investors often look at various options that will help them save tax and, in the process, earn some returns as well. One such tax product that made a comeback last year is infrastructure bonds, using which one can further save on taxes. Infrastructure bonds are not a new concept and were available till 2005-06 for retail investors.

For most people, tax planning is synonymous with confusion and complexity. The various investment avenues available require their own share of research so as to maximise tax savings. Keeping this constraint of an individual investor in mind, let?s try to understand what infrastructure bonds are and how to benefit from investing in the currently open schemes.

What are tax-saving infrastructure bonds?

Infrastructure bonds are issued by government or non-government institutions for building infrastructure. These bonds lend to projects related to transportation, electricity generation and other public facilities. Long-term infrastructure bonds are eligible for exemption from income tax to the extent of R20,000 for the financial year 2011-2012 under Section 80CCF of the Income Tax Act, 1961.

Why invest in them?

Investments up to R20,000 in infrastructure bonds are deductible from your taxable income. Your taxable income reduces by the investment you make in these bonds, subject to an upper cap of R20,000. The tax-saving investment under this new Section (80CCF) is over and above the R1 lakh that is tax-exempt under Section 80C. This means an additional saving of R6,180, assuming you fall in the income tax bracket of 30%. This extra R20,000 deduction is only available if you invest in infra bonds and no other option, making it worth consideration.

What if you invest more than R20,000?

There is no upper cap on investment in infra bonds. The investment over and above the initial R20,000 in not tax deductible and one has to pay tax on the capital invested. Although you pay tax on the capital, you still earn in the form of interest payments promised by the issuer.

What are the options available?

Currently, IDFC Infra Bonds (February 25) and SREI Infra Bonds (March 6) issues are open (for details about the IDFC bond, see graphic). Even if you were not able to invest in previous issues such as IFCI and L&T, do not lose hope. There will be multiple issues right till the end of the financial year and you can invest in any of them till March 31.

How to choose the best one?

Most of the features like tenure, buyback option, minimum investment and exit option are almost common for all the offers and, hence, cannot be used as differentiators. The main features which you should focus on are:

Interest rate ? The more the better

Credit rating ? The higher the rating, the better the option

Financial health of the issuer ? This is an important factor. Never compromise on the financial position of the issuer. It?s a long-term investment, so the issuer should be fundame-ntally strong.

Government backing ? You should also consider the support available to the issuer from the government. It makes the investment more secure.

How appropriate is this investment option?

This is one of the best investments with respect to tax saving as it extends the Section 80(c) limit by R20,000. However, if you wish to evaluate its appropriateness as an investment beyond R20,000, then this option appears quite weak compared to other options.

The features where it doesn?t fare as well as PPF, FD, NSC and others are:

The interest income is taxable. So, the actual rate of return you get is 5 to 8%.

Investment in infra bonds is highly illiquid, at least till the lock-in period.

These investments are less secure compared to PPF, FD and NSC investments.

Keeping the above constraints in mind, it?s advisable to invest only R20,000 in these bonds for the purpose of saving tax. This option, at the best, gives returns equivalent to the inflation rate. If you take inflation into consideration your real return falls in the range of 1-2%. Investment in infra bonds works best for tax saving and not capital appreciation.