REC Tax Free bonds-You should invest

REC Tax Free bonds-You should investREC Tax Free bonds-You should invest

Amidst of stock market volatility, investors are finding some good investment options. Apart from SREI NCD which offers secure and safe investment, currently REC tax free bonds hit the market. The interest rates are as high as 8.71% per annum that too it is tax free. There are several reasons why you should invest in such REC Tax Free bonds. In this article, I would indicate about its features and positive factors of REC Tax free bonds. Good part is NRI’s can also invest in REC tax free bonds.

About Rural Electrification Corporation

Rural Electrification Corporation (REC) Ltd is a public sector company. REC provides loans to state power utilities in rural electrification schemes. This is one of the Navrathna Company.

Also read: Best Tax Free Investment options in India

Features of REC Tax Free Bonds

  • Issue start date: 30-Aug-13
  • Issue end date: 23-Sep-13
  • Face value of the bond is Rs 1,000.
  • Minimum investment – 5 Bonds i.e. Rs 5,000 and in multiple of 1 bond there-of
  • Interest rates and tenure are a) 10 Years – 8.26%; b) 15 years – 8.71%; c) 20 years – 8.62%
  • Non retail investors would get interest rate of 0.25% lower than the retail investor.
  • 40% is reserved for Retail investors and 20% each for HNI, Corporates and QIB’s. HNI includes NRI’s
  • REC tax free bonds interest is paid annually.
  • There is no tax on the interest from these bonds, hence no TDS deducted.
  • Lead Managers: ICICI Securities, AK Capital Services, Axis capital and Edelweiss Financial services
  • These Tax free bonds would be listed in BSE and NSE. Hence these are liquid investments.
  • Non-Resident Indians (NRI’s) can invest in these REC Tax free bonds.
  • You can apply in demat form or physical form.

Below is the Interest rates chart along with pre tax returns for individuals on various tax brackets.

REC Tax Free bonds-Interest chart

*Effective yield is pre-tax returns benefit

Why to invest?

  • REC is a public sector company and it is safe to invest.
  • Attractive tax free returns up to 8.71%. If you are in high tax bracket of 30%, your pre-tax return works out to be 12.6%. Currently banks are offering 9% interest rates (pre-tax). Similarly if you are in 20% tax bracket, your pre-tax return works out to be 10.97%. Hence these bonds offer good interest rates for such high tax bracket individuals.
  • CRISIL, CARE, India Ratings and ICRA have rated AAA for this Tax free bonds issue.
  • Last issue (Feb/Mar-13) from REC tax free bonds had interest rates of 7.54%. This is a good opportunity to get 8.71% interest rates.

Why not to invest?

Nil

You may also like: What are FMP Mutual funds and how they are tax efficient than bank FD's

How to apply?

Since these are issued through demat form, you can apply through your demat account. Alternatively if you do not have demat account, you can apply through physical form by downloading application from ICICIdirect.com website. I feel it is better to apply through demat account for easy liquidity.

Please note that these are tax free investments and not tax saving investments. Returns are tax free. However you cannot show these investments under section 80C for tax saving purpose.

Conclusion: REC Tax Free bonds provide good returns for long run for high tax bracket individuals. There is no reason why you should not apply. Since the interest rates are high and that too the returns are tax free, you should invest in these tax free bonds.

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Suresh
REC Tax Free bonds

20 comments

  • vikas

    Hi Suresh,

    I have invested around 4 lacs in a 5 year FD as contingency fund in my moms name (senior citizen) where the interest is around 10%

    I am getting tempted break this FD and put the entire amount in 20 year REC bond.

    would you suggest that ?

    thanks
    vikas

    • Vikas, It depends. If you mother do not have any other income, Rs 4L @ 10% gives you Rs 40,000 interest per annum. Since this is less than Rs 2 L taxable limit, there is no tax. if you invest such amount in REC bonds where the interest is less than 9%, you would be the looser. Suppose if you are in 30% tax bracket, then same amount post tax would be Rs 27K if you invest. But if you invest in REC bonds, entier amount of Rs 36K is tax free. Hence it would be better for you and not for your mother. I hope I have clarified your query. Please get back for further questions.

      • Karthik

        Suresh, a clarification here – Vikas says he has invested in his mother's name – which, I assume, means income is his which he has invested under her name. In such a case, the interest earned would be treated as Vikas' income afaik. Hence, it will very much fall under Vikas' tax liability. Correct me if I am wrong.

        • Karthik, Here my assumption is the money pertains to her mother, hence income tax would be payable seperately by her. I agree that if son invests on behalf of mother, “clubbing provisions apply” and such interest would be added to Vika’s income and necessary tax is payable. However for Tax free bonds, there would not be any such interest.

  • ARUNKUMAR

    Suresh,

    Can we show this investment as part of 80c ?

    • Arun, Please note that these are tax free investments and not tax saving investments. Returns are tax free. However you cannot show these investments under section 80C for tax saving purpose. I have updated this in the post itself as I got similar queries

  • Karthik

    Hi Suresh,
    How much better is investing in REC compared to parking in PPF? PPF also helps save tax, interest is also non-taxable. If someone has opened a PPF account like even 2-3 yrs ago, withdrawal is that much earlier @ same interest right?
     

    • Karthik, You have certain limitations for PPF. The maximum amount to be invested is Rs 1 Lakh. There is no such restriction in tax free bonds. Also these are easily tradeable on stock exchanges and these are liquid investments. PPF, you cannot withdraw up to 15 years. NRI’s cannot invest in PPF whereas they can invest in Tax free bonds.

      • Karthik

        Thanks Suresh, makes sense. Had a discussion with my (conservative) dad abt parking some 1.5-2 lakhs of mom's earnings. I had high hopes of splitting it b/w SREI, Muthoot & REC. Dad appears absolutely averse to 1st two citing unpredictable market.
        Looks like REC all the way. 🙁

  • Kishore

    Hi Suresh,

    Thanks for posting this. Can we show this invested amount for tax exemption?

     

    Thank you

    Kishore B

    • Kishore, Please note that these are tax free investments and not tax saving investments. Returns are tax free. However you cannot show these investments under section 80C for tax saving purpose. I have updated this in the post itself as I got similar queries

  • suneet

    Dear Suresh thanks alot for your regular posts on investment options.

    I have a question on the point "These Tax free bonds would be listed in BSE and NSE. Hence these are liquid investments."

    Does this mean i can sell these bonds from my demat account any time before the maturity ?

    If yes how does it work, how much amount will i receive for example if sell these bonds after 31/2 years.

    Thanks in advance.

    Regards,

    Suneet

    • Suneet, Yes what you said is right. However since these are listed on BSE/NSE, the price of the bond can vary depending on the maturity and interest rates. e.g. if you are nearing interest rate date, the price of the bond would be enhanced and it may get traded little bit high or low.

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