There have been series of Tax free bonds in last two months from likes of HUDCO, IIFCL, REC, PFC and IRFC. IRFC, PFC had come out with its Tranche- II of Tax Free Bonds and now REC (Rural Electrification Corporation Limited) too has come out with tranche – II of Tax free bonds which would be open for subscription between February 25 till March 15, 2013.
REC Tax Free Bonds – Significant Points:
- Offer Period: February 25 – March 15, 2013 (the offer can be pre-closed on full subscription)
- Annual Interest Rates for Retail Investors:
- 7.38% for 10 Years
- 7.54% for 15 Years
- The interest rates are 0.5% less for HNIs, QIBs and corporate subscribers.
- Price of each bond: Rs 1,000
- Minimum Investment: 5 Bonds (Rs 5,000)
- Max Investment Limit for Retail Investor: Rs 10 Lakhs
- Reservation: 40% reserved for retail investors
- NRIs can invest: NRIs can invest as retail investors or in the other category for the REC tax free bonds.
- Rating: ‘CARE AAA’ by CARE and ‘CRISIL AAA’
- Allotment: First Come First Serve
- Listing: Bonds would be listed on BSE and NSE and will entail capital gains tax on exit through secondary market
- You can apply for these bonds in the Demat or the physical format, but for trading you need to have them in the Dematerialized format.
- Step Down Clause: The bonds will come with a step-down clause, according to which only the original allottee, who has subscribed under the retail category will receive the coupon of 7.38% – 7.54% depending on tenure. On sale or transfer, the benefit is lost and rates reduce to that applicable for other investors (6.88% for 10-year bonds and 7.04% for 15-year bonds).
Why you should invest?
- The bonds are secured to the full extent and have the safest credit rating (AAA)
- The interest rates on future tax free bonds might be lower as RBI might moderate its policy rates further
- Reduction in interest rates would means an increase in the price of bonds thus giving capital gains
- There are also speculation about lesser numbers of tax free bonds would be issued next year post this budget.
Why you should not invest?
- The interest rate offered by PPF is 8.8% tax free. You should exhaust your maximum PPF limit of Rs. 1 Lakh before you look for tax free bonds
- If you are not in higher tax slab of 20% or more
- These bonds don’t make much sense for NRIs as they can get better returns on NRE fixed deposits with banks that offer rates of around 9 per cent, tax-free
REC Tax Free Bonds – Who should apply?
As for most tax free bonds, these are good for investors in high income tax bracket of 20% and 30%. Today the maximum rate offered by bank fixed deposit is 9%. This translates into a post tax return of 7.2% for 20% tax slab and 6.2% for 30% tax slab. This is lower than REC’s 10-year and 15-year tax free bonds.
Along with the above, it suits investors who want regular income from interest payment and have low risk profile.
Rural Electrification Corporation Limited (REC) is a public financial institution. The principal products of REC are interest bearing loans to state electricity boards (SEBs), state power utilities/state power departments and private sector for all segments of power infrastructure. The Company reviews and revises its lending and operation policies/ procedures. It is diversified into other related areas and activities, such as financing of decentralized power generation projects, use of new and renewable energy sources, consultancy services, transmission, sub-transmission and distribution systems, renovation, and modernization and maintenance.