Though infrastructure is financed jointly by central, state and local governments through grants and transfers, the operational and maintenance costs must be met by the cities. However, these cities are already struggling with limited municipal revenues. Accordingly, the basic urban infrastructure in India is poorer than those in the OECD and BRICS nations.
Rationale of Reforms: Citizen as Partner
In this context, for India to become a trillion-dollar economy, its cities need significant infrastructure upgrades. This requires substantial capital investment. Improved infrastructure will increase property valuations, leading to higher capital values during property sales.
To capture this value and ensure citizens are partners in these infrastructure developments, it is proposed that the Finance Minister make provisions in Budget 2024 to make infrastructure bonds and municipal bonds attractive.
Proposal A: Bring Back Infrastructure Bonds in Budget 2024
A nation’s infrastructure directly impacts its growth; better infrastructure leads to faster economic advancement. Taxpayers provide the majority of the funds needed to build a nation’s infrastructure, which must total billions of dollars to meet international standards. While raising such large sums independently is challenging, getting Indian citizens to contribute to this cause can significantly help meet this financial need.In 2010, to attract more investors, the government created a unique section in the Income Tax Act, including Section 80CCF, to provide incentives to investors. Section 80CCF allowed an additional deduction of Rs 20,000 for infrastructure bonds. Citizens in the 30% tax bracket could save around Rs 6,000 in taxes this way. But this section was discontinued in 2013-14.
Proposal B for Budget 2024: Include Municipal Bonds in the Category of Infrastructure Bonds
Municipal bonds are debt security instruments issued by urban local bodies to raise finances for spending on infrastructural development projects within cities. India has more than 4,000 municipal corporations and municipal councils (Government of India 2021). But only a handful have raised finance through municipal bonds. Most Indian municipalities have resorted to traditional forms of urban financing, like capital grants and multilateral funding, for their activities.
With an amount outstanding of more than Rs 2,500 crore as of February 2024, the Indian municipal (muni) bonds market accounts for less than 0.02% of the Indian bond market (which is roughly Rs 190 lakh crore). This indicates that the muni bond market is still untapped and provides huge scope to finance the initiatives under Viksit Bharat 2047 – a central government plan to make India a developed nation by 2047.
Municipal bonds have been declared as one of the alternative tools for financing urban infrastructure projects by the present NDA government, especially in the development of smart cities (Smart City Guidelines, 2015). Issuance of municipal bonds is also an incentivised reform under AMRUT 2.0 (Amrut 2.0 Toolkit, 2021), making the prospects of muni bonds favourable.
AMRUT 2.0 provides an incentive of Rs 520 crore for the issuance of municipal bonds to eligible cities. It covers an initial incentive of Rs 13 crore subject to a maximum incentive of Rs 26 crore per city. There is a further incentive of Rs 10 crore with a maximum limit of Rs 20 crore for green bonds. Yet, there is no incentive for citizens to subscribe to muni bonds.
The muni bond market finds more acceptance in other countries like the USA due to its tax-free nature. In India, as per Section 10(15)(vii) of the Income Tax Act, 1961, interest income from bonds issued by local authorities was exempt; however, such exemption has been withdrawn, leading to tax liability on interest.
Due to this, municipal bonds in India are issued through private placements, where merchant bankers provide funds without resorting to a public issue. To increase investor confidence in municipal bonds, the Securities and Exchange Board of India (Sebi) and the National Stock Exchange of India (NSE) have undertaken several initiatives.
In the upcoming budget 2024, allowing a deduction for investment in municipal bonds and exempting the interest on these bonds from tax would make them more attractive. This would lead to twin benefits: Consumers would have more disposable income and municipalities would have easier access to funds without relying on grants.
It is therefore proposed:
i. To include municipal bonds in the category of infrastructure bonds
ii. Exempt interest on infrastructure bonds under the new taxation scheme in the hands of investors
iii. Allow deduction under Chapter VIA up to 50% of investment in general bonds and 100% of investment in case of environmental bonds like green or water bonds, with maximum investment allowed at Rs 2,00,000 per assessee in a year in the new scheme of taxation
iv. The deduction should also be extended to NRIs
Benefits to the consumer have been explained below:
Illustrative Example
Let us assume the following:
- Ajay does not make any investments in infrastructure bonds
- Ravi invests Rs 2,00,000 in infrastructure bonds but opts for the old taxation scheme
- Ram invests Rs 2,00,000 in general bonds and opts for the new taxation scheme
- Shyam invests Rs. 2,00,000 in green bonds and also opts for the new taxation scheme
The benefits available to Ajay, Ravi, Ram and Shyam, assuming the budget accepts the proposed amendments, are explained below:
Options for Benefits if Infrastructure Bond Deductions are Reintroduced under the New Scheme
| # | Particulars | Ajay | Ravi | Ram | Shyam |
| (Without investment in infrastructure bonds) | (With investment in Infrastructure bonds – Old scheme of taxation) | (With investment in general infrastructure bonds – New scheme of taxation) | (With investment in environment infrastructure bonds – New scheme of taxation) | ||
| 1 | Gross Total Income | 10,00,000 | 10,00,000 | 10,00,000 | 10,00,000 |
| 2 | Deduction 80C | 1,50,000 | 1,50,000 | N.A | N.A |
| (Not available under the new scheme of taxation) | |||||
| 3 | 80CCF: | ||||
| Proposed | |||||
| 3.1 | General Bonds Rs 2,00,000 | – | – | 1,00,000 | |
| (50% deduction) | |||||
| 3.2 | Environmental Bonds: Rs 2,00,000 | 2,00,000 | |||
| (100% Deduction) | |||||
| 4 | Total Income | 8,50,000 | 8,50,000 | 9,00,000 | 8,00,000 |
| (1-2-3) | |||||
| 5 | Tax | 82,500 | 82,500 | 45,000 | 35,000 |
| 6 | Cess 4% | 3,300 | 3,300 | 1,800 | 1,400 |
| 7 | Total Tax(5+6) | 85,800 | 85,800 | 46,800 | 36,400 |
| 8 | Tax Saving | 39,000 | 49,400 |
It can be seen from this table that implementing this change will increase the acceptability of the new taxation scheme; provide substantial funds for municipalities without creating additional formalities; add disposable income for consumers (saving of Rs 39,000 to Rs 49,400 in case gross total income is in range of Rs 10,00,000 per annum); and make it more attractive for municipalities to issue environmentally friendly bonds.
(Neelam Rani is Associate Professor (Finance & Control) at IIM Shillong, Pankaj Goel is Team Leader for The World Bank Project in the State of Jharkhand.)