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Municipal bond in India
Municipal bond 

In 2000-01, the Government inserted a new clause (vii) in Section 10(15) of the Income Tax Act, 1961, exempting interest income from bonds issued by local authorities.
Guidelines for issue of municipal tax free bonds have been revised in consultation with the Ministry of Finance and circulated to all the State Governments and UT Governments on 7th March, 2006.

As per guideline the funds raised from Tax Free Municipal Bonds shall be used only for capital investments in urban infrastructure for providing one or more of the following:
         i.            Potable Water Supply;
       ii.            Sewerage or Sanitation;
      iii.            Drainage
     iv.            Solid Waste Management;
       v.            Roads, Bridges and Flyovers; and
     vi.            Urban Transport (if this is a municipal function under respective state legislation)
The capital investments shall be for the following purposes :
(a)    setting up of new project(s);
(b)   expansion, augmentation or improvements of the existing system.
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  • Municipal Bonds issued by the ULBs, are redeemable after a specific period and have a definite rate of interest.
  • Municipal bonds are appropriate instruments - raising resources, channeling funds from the capital market into infrastructure development.
  • Long term in nature, unlike bank loans that are of shorter tenure.
  • Provides opportunities for long gestation infrastructure development projects. 
  • About 11 ULBs out of 65 continued their reliance on institutional and bank borrowings to finance urban infrastructure projects from commercial banks.
  • Agra , Allahabad, Lucknow , Varanasi, Kanpur, Meerut are using JnNURM revolving fund to fund the capex for their projects.

Municipal bond issues in india

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Pune Municipal Corporation raised Rs 200 crore by issuing 10-year municipal bonds
The money raised from the bonds will go towards infrastructure projects for the city. Next in line are municipal bonds for New Delhi and Ahmedabad. Like any other bond, municipal bonds are debt instruments—a promise to repay a fixed principal amount with interest periodically, which can be paid at fixed intervals or at the end of the tenure, with the principal. For instance, the coupon rate for Pune municipal bonds was 7.50% semi-annual. In the case of the Pune municipal bonds, the money collected will be used to provide uninterrupted municipal water supply in the city.

The Government of India allowed ULBs to issue tax-free municipal bonds in 1999-00 and has amended the Income Tax Act (1961 vide the Finance Act 2000) inserting a new clause (vii) in Section 10(15), whereby interest income from bonds issued by local authorities was exempted from income tax. The GOI issued guidelines for issue of tax-free municipal bonds in February 2001. It has been clearly specified that the funds raised from these tax-free municipal bonds are to be used only for capital investments in urban infrastructure like potable water supply, sewerage or sanitation, drainage, solid waste management, roads, bridges and flyovers; and urban transport. 

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