Reader Question: Tax Saving Fixed Deposit or Infrastructure Bond

Kunal still has some way to go before he reaches his 1 lakh limit, and he left a comment about comparing a tax saver fixed deposit with the 80CCF infrastructure bond, and which one works out better.

I responded to that question, and since I’m a bit lazy today I thought I’d use that response as a post for today.

Here are my thoughts:

Personally, I’d opt for the fixed deposit, and here is my thinking behind it:

1. First and foremost, you get tax saving FDs that pay higher than the bonds, and there is a possibility that even these rates might get hiked in a few more days. So even though the absolute sum won’t be very high, one point in favor of the tax saving fixed deposit.

2. When you have the option available within your 80C (1 lakh) limit then use that up, and keep the option of infra bonds open in case you find that you can invest in them later on.

3. You will have to wait a little bit to get the investment proof, and then some people have faced the issue where the allotment advice has been sent to their old addresses, or the bonds are in the wrong name, or other issues to produce proof of payment.

4. There are some other issues that people have faced like a person wanted to close their Demat account, but since the infra bonds they owned were locked – in – they couldn’t do it right away.

5. The bank fixed deposits are more secure than the unsecured infrastructure bonds, although a situation where such companies will come to a point where they default on their bonds is unlikely.

So, I’d personally make a decision keeping all these points in mind.

What do you think? Does this make sense? Would you do things differently or have to add anything?

27 thoughts on “Reader Question: Tax Saving Fixed Deposit or Infrastructure Bond”

    1. Dear Sateesh – for retail investors it is better to diversify risk and invest in mutual funds. As for timing – regular investing is better than trying to time the market.

  1. Had applied for IIFCL bond from my SBI demat on 15th Feb 11, but I still have to receive any kind of acknowledgement about my purchase. Any idea what I should do, coz they aren’t responding to any mails/calls in a positive manner.


    1. Rahul – the past issues have taken as much a month after closing to credit the bonds to your demat account, so I’d say wait a bit. The documentation you need for tax proof should already be with you for tax proof purposes.

      1. The documentation which should have been sent from SBI Cap Securities is what is missing. Just wanted to know whether SBI Demat holders are facing this very problem, as ICICI Direct auto-mails it in a day or two.

    1. Samarth – This bond gives you the opportunity to lock into 9.75% for at least 5 years. You may get 8% this year, but if interest rates go down a year from now then you may just get 7 or 6.5% for your money while someone who subscribed to this bond will continue to get 9.75%.

      I’m not saying this is not going to happen, just answering your question on why someone would like to go for such a thing.

  2. Please advise whethr the investment in Tax Saving Infrastructure Bonds , on withdrawal (after the lock in period ) will be added to my income for that year.

    Narayan Nilkanth Rajadhyax

    1. No, it won’t be added to your income. If you’re taking the interest option, then the interest will be taxed every year. If you opt for the cumulative option, then capital gains will be charged on the bond.

  3. Hi Manshu,
    As I understand, beyond 1 lakh we can use only the infrastructure bonds to get tax exemption. So the question of comparing the tax saving FD with infrastructure bonds arises only if you plan to buy bonds for a value more than Rs. 20,000 in a financial year. Have I got this correct?

    1. Beyond 1 lakh – Infrastructure bonds are one thing that can get you tax relief, then medical premiums are another, and donations to charitable institutions another.

      However, each of these has a cap on them. In case of infrastructure bonds – the cap is Rs. 20,000 which means that even if you buy bonds worth Rs. 25,000 you will get tax benefit of only Rs. 20,000.

      So, there is actually no benefit of making an investment that’s greater than Rs. 20,000 in infra bonds.

      Now, when would you compare the two? – You’d compare them when you have not yet reached your 1 lakh limit, and for whatever reason can’t invest the whole 120,000 needed to avail these two benefits together.

      So, suppose I have not made any tax saving investment this year, and I just want to go for safe investments with the lowest lock in period possible. That’s the time when it’d make sense to evaluate between these two.

      I hope I was articulate enough to explain this clearly? Please let me know if this makes sense, or if you have another question?

  4. Hey Manshu,
    Thanks a lot for creating a separate post on this, it is really useful.

    In-fact, I’m commenting so late, as I was in bank. 🙂
    Could not read this post before deciding.

    I was certain for a Tax Saving FD when suddenly I came across a thought that what If I invest the same amount (18k – to cover 1L limit) in the existing ELSS fund I have.
    The person at SBI (Magnum Tax Gain) told me that I could add more amount to existing folio w/o disturbing the SIP. So I did it.
    Hopefully I didn’t take wrong decision.

    Thanks again.

  5. A quick thought. If we invest Rs. 20000 in the infra bond there is a tax benefit that we see immediately. That is almost like a return of 30% right away. On top of that there is 8% interest for the next 5/10 years. Is that not a good deal or am I missing something here.

    1. The fixed deposits that we’re talking about here Natti are also tax saving fixed deposits. They come under section 80C, and also work to reduce your taxable salary, and give you the gains you just mentioned Natti.

      1. Absolutely, but one the 1L is exhausted, this definitely looks like additional money in the purse. Is my understanding correct.

        1. Once the 1L is exhausted – yes. In Kunal’s case the 100k was not exhausted though, and hence the question.

          Else, it’s a straightforward decision as you point out.

  6. From the returns prespective, infrastructure bonds are treated as debt instruments and hence the interest earned is taxed at 10% (or 20% with indexation benefit). Interest on FDs are added to your income for tax calculations.

    So from the perspective of the taxation on the interest earned, for those individuals in the higher income bracket (or those who expect to be when the investment matures), Infra bonds are more tax efficient.

    1. Shrinidhi,
      I’m not too sure that infra bond interest is treated as debt capital gain and taxed at 10% or 20% with indexation. I think it still counts as interest.
      Do you have a source which states otherwise?

      1. SS – I went through the prospectus of IDFC again, and it says that the interest will be taxed according to the tax provisions on the interest. This is at page 47 under the head Taxability of Interest.

        So, I think you’re right here. In fact in going back to my own 80CCF FAQ – I find that that’s what I wrote, but later forgot about it.

        Thanks for bringing out the point for your counter – point.

  7. If you are buying these bonds through ICICIDirect then they are providing you with an acknowledgement receipt immediately after the purchase of the bonds, this is a new feature which has been added recently so this should eliminate the problem of securing the allotment advice. Alternatively one can also take a printout of your account which shows the allotment and this suffices as an investment proof also. So there is one Plus for Infra bonds…:)

    1. Thanks Pallavi – I wasn’t aware of this, and it’s a great thing that this has started, as a lot of people had to struggle for this earlier.

    2. You can get acknowledgement receipt immediately any were you can buy bond.
      It’s simple process when you cheque deposit in bank you get acknowledgement slim immediate, same here also. You can submit acknowledgement slip as a proof.

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