Budget 2015: Given the good they do nation, infrastructure bonds should be open to all

The Section 54EC of the Income-tax Act, 1961, offers an exclusive tax shelter for long-term capital gains – investment in Rural Electrification Corporation (REC) or National Highway Authority of India (NHAI) bonds that allows exemption from tax on long-term capital gain.

The section is very liberal in allowing anyone, including companies to get under its shelter. In its pristine form, it was so liberal that it did not impose any ceiling so that one could invest any amount he wanted.

Naturally, corporates lapped it up. The government soon realised that it had given too much away and hence restricted the investment to Rs 50 lakh in one or two financial years in respect of a long-term capital gain. The tightening of the purse strings affected the well-heeled corporates more than anyone else.

These bonds are highly popular with long-term capital gains earners. But they must come out of their groove and become available to any taxpayer with any type of income and not necessarily long-term capital gains.

As it is, Section 80C is the only omnibus avenue for tax-oriented savings/ investments but it has an upper limit of Rs 1.50 lakh. It pointedly shuts its doors on long-term capital gains, and rightly so, because they are in any case pampered in so many diverse ways, including the section 54EC tax shelter.

There are two reasons why these and similar infrastructure bonds should cater to all the income earners. Firstly, it is wrong to pamper long-term capital gains alone on the specious and invidious ground that bulk of it is not real, with inflation being the proximate cause.

Secondly and more importantly, the nation can do with generous investments in infrastructure. The government ought to be indifferent between tax collections and funds mobilised for infrastructure. This means if one saves his tax liability by investing in such bonds, he should be lauded and not pilloried.

A scheme on the following lines must be at once equitable to both the exchequer and the taxpayer. The rate of interest on such bonds should be 5 percent per annum. The lock-in period should be seven years with premature withdrawal resulting in wrenching away of the tax exemption already availed.

First Rs 2 lakh of investment in such bonds should beget 100 percent deduction from one’s gross total income, with every additional Rs 1 lakh of investment begetting a progressively lesser deduction.

If one has invested Rs 10 lakh in such bonds, the deduction should be calculated as follows: On first Rs 2 lac, deduction 100 percent, on the next Rs 1 lac, 90 percent and on the next Rs 1 lac, 80 percent and so on. Thus this person will get a deduction of Rs 6.40 lakh on an investment of Rs 10 lakh in these bonds.

Anyone investing more than Rs 10 lakh should be made to pay a heavier price for tax exemption – only 10 percent of investments in excess of Rs 10 lakh would be eligible for deduction.

Thus if a wealthy individual invests Rs 20 lakh in such bonds, he would get a deduction of Rs 6.40 lakh on the first Rs 10 lakh and another Rs 1 lakh on the remaining Rs 10 lakh. And the one investing Rs 100 lakh is welcome to do so but the tax benefit he would get is only Rs 15.40 lakh.

In short, the scheme should welcome any amount without any ceiling in keeping with its motto that the government is indifferent between tax and cheap funds but make the well-heeled cough up more by way of investments. They shouldn’t mind given the fact that they can, at the end of seven years, redeem their investment in these bonds whereas tax, in their minds, is something that goes down the drain.

It is like wisely plumping for payment of EMI instead of rent – rent goes down the drain whereas the same amount paid by way of EMI goes slowly and steadily towards creation of a valuable property.

The government even while encouraging tax culture must not look down upon tax savings through infrastructure-centric investments. The earlier scheme of investment in infrastructure bonds which is no longer open was miserly – with a maximum tax deduction of Rs 20,000 whether you invested Rs 20,000 or Rs 40,000.