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India is seeking to boost investment by slashing its withholding tax on rupee-denominated infrastructure bonds to 5 per cent from 20 per cent, a Finance Ministry document seen by Reuters shows.

The lower tax will apply to bonds issued from July 1, 2012 to June 30, 2015, according to the official document sent to banks on Monday. Eligible bonds under this scheme should have an original maturity of three years or more, the document showed.

Foreign investors would need to remit funds in foreign currency to be able to buy the rupee infrastructure debt, a senior government official and a custodian banking head at a foreign bank told Reuters.

The action matches the government's cut in the withholding tax on dollar-denominated infrastructure bonds - which applied to interest payments by Indian borrowers - and on external commercial borrowings, both of which were implemented earlier this year.

The government has given prominence in its latest economic and fiscal reforms to repairing India's sagging infrastructure, including establishing a National Investment Board to speed up clearance for projects.

Frequent power cuts, poor roads and an antiquated railway network have impeded India's economic development. In July, a collapse in three transmission grids cut power to 670 million people.

Foreign investment into infrastructure bonds had lagged this year as overseas investors complained of poor returns after paying the previous withholding tax of 20 per cent.

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