REC 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.
*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?
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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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REC Tax Free bonds
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Is the interest (i.e 8.7% for unsecured NCD & 8.46% for secured NCD under 15 yrs duration) will be paid annually?
if it is,then its not an wise idea as I think.Plz correct me if I am wrong.If the interest would be paid annually,then it is simple interest we r talkin about.Like If i purchase secured bond worth 10,000/ for 15 yrs,then Rs 846/ will be paid annually for 15 yrs i.e total interest payable is (15*846)=12,690/ which is tax free.
Now if I park the same 10,000/ in bank FD with 8.75% quarterly compounded annual interest,then for 15 yrs the total interest would be =26,978/.Now if I apply 30.9% tax on 26978/ ,it would come around 8336/ i.e post tax income would be 26978-8336=18642/.
Priyajit, Yes it would be paid annually. If you see the table, it indicates what would be effective yield for 30% bracket. You would get pre-tax returns of 12.6% whereas banks pay you 8.75%. Here you are counting 846×15 which is paid annually. If you deposit this amount in banks every year, your Rs 12,690 would also generate interest. Do you know that such amount comes to Rs 13,000+. Means your total amount would be Rs 26,537. Please check and let me know in case you still have any doubts on this.
Thanks Suresh.I missed that point.Thank u once again for correcting me.
I have oe query regarding the payment of interest if I would bought these REC bond.Is the interest will be automatically debited to my demat acc annually??
Priyajit, There is an option to select ECS / Cheque. Based on this the annual interest would be paid.
I am looking to invest Rs.1 Lakh, i am in 10% tax bracket, suggest me the best tenure?
what would you suggest ?
well…! suresh i have also read the same article in TOI i have mentioning few lines, i want to clarify something
The biggest draw for the investor is that the interest earned from these bonds is tax free. Assuming a tax-free coupon yield of 8.2%, the implied pre-tax rate will be to the tune of 11.79% for investors in the 30% tax bracket. Since the recent spike in the bond yield was largely due to the RBI’s short-term efforts to prop up the rupee, the yield is likely to fall once the currency stabilises. If the yield falls, the value of these bonds will shoot up in the secondary market. The investors will have the opportunity to book profits by selling these bonds. While short-term capital gains from such a sale will be taxed as normal income, long-term capital gains will be taxed at 10%. The bonds must be held for at least 12 months for the profits to be treated as long-term gains. "
– Can you please elaborate "long-term capital gains will be taxed at 10%." what that mean;? i.e: is that i have to pay tax for 10% for that?
The market will soon be flooded with taxfree bonds. Even as the government has allowed several PSUs to raise up to 48,000 crore during 2013-14 (see table), the Rural Electrification Corporation (REC) is the first one to hit the market."
– Should i wait for other bonds?
what would you suggest ?
Hi Sumit, If you are in 10% tax bracket, these bonds may be that helpful for you comparing to higher tax bracket. The returns are tax-free. However these bonds would be listed in stock exchanges. Means your bond of Rs 1,000 can trade at any rate of higher than Rs 1,000 or lower than Rs 1,000. If due to interest rate fluctuations, there can be demand for such bonds in future and the face value can be higher than Rs 1,000. If you sell say at Rs 1,050. Means Rs 50 is profit. You need to pay tax on such capital gains. If you sell them after 1 year, it would attract long term capital gain and you need to pay 10% of profit. In this example, you need to pay Rs 50 profit x 10%.. Means Rs 5 tax needs to be paid. However if you redeem after 10, 15 or 20 years after tenure, you would get only Rs 1,000 per bond and no further tax is payable. You can wait for other bonds too. Howeever the interest rates can change.