Industry body Assocham has urged the government to review withdrawal of an investment benefit provision consisting of deduction from investing in long-term infrastructure bonds with a five-year lock-in period.

An amount of Rs 20,000 was eligible to be reduced from taxable income of an individual. In its pre-Budget representation to the government, the Associated Chambers of Commerce and Industry of India had suggested enhancement of this limit to at least Rs 50,000 per year to encourage and mobilise large investments in the infrastructure sector.

“It is paradoxical that despite a need to expand availability of such long-term funds, the scheme has been withdrawn abruptly,” said secretary general D.S. Rawat.

“We request the government to immediately review this investment benefit provision and take a pro-active restoration which is need of the hour.”

The deduction was introduced two years ago to encourage investors to put money into infrastructure bonds. The tax benefit depended upon the slab in which an individual belonged. This was an additional benefit as compared to Rs one lakh investment limit under section 80C of the Income Tax Act.

But the section was applicable for just one financial year (2010-11) and later extended for one more financial year (2011-12). Now there is no mention in the Union Budget for 2012-13. This means that the term of this section has not been extended and will end by this month-end.

"This will be a huge blow to individual investors as it will actually push up their tax burden which will eat into the savings that they could have made due to the rise in basic exemption limit,” said Rawat.

Take the case of a person with an annual income of Rs six lakh. The saving one would have got earlier was Rs 2,000 on account of rise in basic exemption limit to Rs 2 lakh. A higher tax of Rs 4,000 due to this benefit ending means that the individual will actually get a negative impact to the tune of Rs 2,000.

For those who are in a higher tax bracket, the net impact will still be positive. The change in tax slab means that there is an additional benefit that is available which is quite extensive. So for an individual with a taxable annual income of Rs 12 lakh, net savings will be Rs 16,000.

Investors should not confuse the increase in permission given to institutions to raise additional amounts of tax free bonds with this particular benefit. Those are tax free bonds where interest earned is not taxed while these are bonds that allow for deduction based on the amount of investment in bonds and interest income earned here is taxable.