Infrastructure bonds have been added as another tax saving instrument this year with investment upto Rs 20,000 being exempted from income tax. Till now investments only upto Rs 1 lakh were considered as exempted from tax under Section 80 (C) of Income Tax Act. Now an additional Rs 20,000 can be invested in infrastructure bonds under Section 80CCF.

The Union Budget for financial year 2010-11 brought the introduction of infrastructure bonds as tax saving instrument. These bonds can however be issued only by those non banking finance companies (NBFCs) which have been categorized as infrastructure finance companies by Reserve Bank of India.

A comparison in characteristics of these bonds is shown with the safest investment option available-fixed deposits in order to see how viable they are to the general investor.

Characteristics of infrastructure bonds:

1.These bonds mostly offer interest in the range of 7.5 to 8%. The rate of interest is based on the basis of interest on 10 year government of India bond and is not allowed to exceed that.

2.The interest earned from these bonds does not come under TDS for an individual.

3.These bonds come for long term with a lock in period. So premature withdrawal is not allowed in them.

4.They allow the depositor to either opt for annual payout of interest or take lumpsum amount on maturity.

5.Investments in infrastructure bonds are tax exempted up to a limit of Rs 20,000.

Characteristics of fixed deposits:

1.Fixed deposits come for shorter duration also. The tenor of fixed deposits varies from as short as 7 days to as long as 10 years.

2.Premature withdrawal of FDs is permitted though banks charge preclosure penalty in such cases. Thus depositor should check all pros and cons before exercising the preclosure option. To know more see here.