Tax-saving bonds seem to have become an opportunity wasted for the government, which is struggling to raise funds for its ambitious infrastructure development programme.

The bonds' unattractive structure seem to have found little favour with eligible taxpayers and infrastructure finance companies are hoping the government would do something to enhance product appeal.

"The incentive for taxpayers is very little. We have received only Rs 18 crore (Rs 180 million) till now via tax-saving bonds, although our capacity to raise funds through these bonds is as much as Rs 6,000 crore (Rs 60 billion)," said H D Khunteta, director, finance, Rural Electrification Corporation (REC). "We are requesting the government to increase the tax-saving limit up to Rs 50,000 or more."

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An infrastructure finance company can raise as much as 25 per cent of the incremental infrastructure investment of the previous financial year via these bonds.

Currently, (unlike completely tax-free bonds), investors can save tax only up to Rs 20,000 of taxable income in these under Section 80 CCF of the Income Tax Act, over and above the Rs 1 lakh investment under Section 80C by investing in these bonds.

Some firms said the government was not very hopeful about the product. "Many of us had recommended the government make it Rs 50,000.

And, we believe if it does become Rs 50,000, the response might actually be more. One reason the government had not accepted the demand was that last year the response was not very good.

So, the government was not sure about the sustainability of these instruments," said Suneet Maheshwari, chief executive officer, L&T Infrastructure Finance. If the response is good this year, they might increase the limit to Rs 50,000, he added.

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Sole reliance on retail participation has also taken a toll on the success of this kind of debt instrument. "For tax-saving bonds, the number of subscriptions required is many, as it is a product targeted at retail investors, to allow their participation in the country's infrastructure development," said Saud Siddique, joint managing director, SREI Infrastructure Finance.

Also, as compared to other instruments, the rates of return are much lower. For instance, a completely tax-free bond of the National Highways Authority of India or Power Finance Corporation offers a high coupon and even allows tax exemption on interest income for periods of 10 and 15 years.

The gains derived via tax-free bonds are not capped, as the investment limit is very high. In tax-saving ones, investors get benefits on investments of only Rs 20,000 (Rs 6,600 for the highest income tax bracket).

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On the other hand, tax-free bonds like NHAI or PFC help investors earn returns of eight-plus per cent for a longer period, and without any tax. In effect, the final rate of return is 11.5-12 per cent.

Infrastructure finance companies are also taking small steps at a time with respect to the size of tax-saving bond issues. For example, SREI, which can raise up to Rs 500 crore (Rs 5 billion) via tax-saving bonds, has come out with a maiden issue of only Rs 300 crore (Rs 3 billion), gauging the market.

"We are just testing the response and, thus, have come out with a smaller issue size without a greenshoe (over-allotment) option," said Sanjeev Sancheti, chief financial officer.

PFC, one of the most successful fund raisers, has raised about Rs 100 crore (Rs 1 billion) so far against its capacity to raise as much as Rs 5,300 crore (Rs 53 billion) through tax-saving bonds. It is planning to issue the second tranche by January end.

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