Tax Concession for Bond Investment

• According to the Income-tax Act, 1961 interest earnings from bonds are not subject to income tax.
• The Wealth-Tax Act exempts the bonds from the purview of Wealth Act.

Long back commercial banks were the only financial institutions in India to meet the long and medium term credit needs of the industrial sector. But the banks were least interested to provide long-term loans for industrial expansion, infrastructure development and for any other social sector projects due to the asset-liability incompatibility in these types of lendings.

Since the time of independence the Indian government was sincerely looking for industrial expansion and infrastructural development across the nation. In order to meet the ever-increasing credit needs for the social sector projects the Government decided to set up a well-spread network of Development Financial Institutions (DFIs). The Reserve Bank of India along with the Central Government put sincere effort to develop the DFIs as the major source of long-term credits for the Indian industries.

In order to encourage the DFIs to extend the much-awaited long-term loans to the industries at low interest rates the Government and RBI provided them with various financial incentives by allowing easier access to low cost funds. The funds raised by Development Financial Institutions (DFIs) have been used in the infrastructural development of our country. Konkan Railway Corporations, National Highway Authority of India, Power Finance Corporations are the well-known names in this field for their successful operations in Indian territory.

In the last couple of years Indian Bond Market has experienced phenomenal growth and expansion. Treasury bills and dated securities issued by the Central Government have been the most important components of Indian Bond Market. Big corporate houses, commercial banks and central public sector undertakings comprise other major issuers in the bond market.

However the state governments, state financial institutions, state level public sector undertakings and urban local bodies are the major players in the local bond markets in India. Funds raised by the State Governments by selling bonds in local bond markets are used to finance the budget deficits of the states.

Setting up a well functioning corporate bond market in India has been one of the burning issues among the Indian policy-makers, market participants and researches in recent time. To develop the guidelines for this upcoming market a high-level committee was appointed by the Central Government in July 2005 under the chairmanship of Dr.R.H. Patil. This committee is meant to deal with corporate debt and securitisation in India.

The recommendations of the Patil Committee report were accepted by the honorable Finance Minister, Mr. P. Chidambaram, during his budget speech. The Finance minister assured that the Government would take necessary initiatives to set up an integrated exchange-traded exclusive market for corporate bonds.