Rural Electrification Corp. Ltd (REC) has launched tax-free bonds for the financial year 2013-14. The issue opened on 30 August and will remain open till 23 September. These bonds offer a tax-free interest at the end of the tenor but no tax deduction at the time of investment. These are usually issued by government entities.
The company plans to raise Rs.1,000 crore with an oversubscription limit of another Rs.2,500 crore from this tranche. Retail or small investors once again get a special treatment with applicable coupon rate increased by 25 basis points (bps) compared with the other category of investors. One bps is one-hundredth of a percentage point. A total of 40% of the issue is reserved for retail investors.
Rate of Interest for REC Tax Free Bonds is as given below:
| | Series A | Series 2A | Series A |
| Retail Investor | 8.26 | 8.71 | 8.26 |
| Other Investor | 8.01 | 8.46 | 8.01 |
| Frequency on Interest | Annual | Annual | Annual |
| Tenor | 10 Years | 15 Years | 20 Years |
Small Investor:
If you are a small investor, which means your application does not exceed Rs.10 lakh across all series, then the applicable annual coupon rate is 8.26% for 10-year maturity, 8.71% for 15-year maturity and 8.62% for 20-year maturity.
HNI or other Individual investor:
If you are an individual investor but your application exceeds Rs.10 lakh, then you fall in category III of “high net worth individual” and the respective coupon rates for you are 8.01%, 8.46%, 8.37% per annum.
Interest Payment:
Interest is paid out only annually in December every year. The bonds are proposed to be listed on BSE Ltd and you will be able to trade them in the secondary market, thereafter. Selling in the secondary market through an exchange or doing an over-the-counter transfer are your only exits in case you don’t wish to hold the bonds till maturity.
However, in case of transfer of bonds or secondary market sale, unless bought by another retail investor, the coupon advantage of 25 bps will cease to exist and the rate applicable to other categories will apply.
Demat or Physical form
You can hold the bond in both, physical as well as demat form. But, if you plan to trade the bond, it has to be in a demat form. BSE is the designated stock exchange for the Issue. As much as 40 percent of the issue is reserved for retail investors.
Income Tax Implications
Interest from these bonds is tax-free bond and doesnot form part of total income.
Capital gains on sale of bonds: When you sell the bond on the exchange, you will have to pay capital gains tax. If you sell the bond post 12 months, the
capital gain will be calculated as per 10 percent without indexation.
If you are not the original allottees of the bond and bought it later in the secondary market, the coupon rate will be lower by 25 bps then the applicable coupon rate for the retail investor.
Should you Invest in these REC Tax Free Bonds
Last year tax-free bonds were not a big favourite among investors as the interest rate was lower and equities looked more attractive at that point. This bond is offering a pretty good rate of return, that too tax-free.
If you are in the
highest Income tax bracket of 30.9%, on a gross basis, the coupon on this issue is equivalent to a pre-tax interest rate of around
12.0-12.5% (depending on the series you consider). This is surely a very good return, especially considering that the risk of default is minimal.
The post-tax return you earn on this bond is better than what you would have earned for a fixed deposit (around 6.9 percent post-tax for those in the highest tax bracket if FD rate is 9.50 percent). This bond will work well especially for those in the highest tax bracket
Retail Investor:
It is advisable to use PPF limit of Rs 1 lac first then think of investing in REC bonds. Since
PPF or EPF carry higher rate of interest.
For High Net worth Investor (HNI):
It is better to invest upto Rs 10 lacs, since ROI is higher for Investment upto Rs 10 lacs. You can split application amount among your family members upto Rs 10 lac each.
