REC Tax Free Bonds

REC Tax Free Bond : Is it right tax saving instrument for every tax payer ?

Rural Electrification Corporation (REC) is the first company to start offering tax free bonds in this financial year 2012 – 13 and their issue opens on December 3rd 2012 and ends on December 10 2012. Such type of issues may come sure in next 3 months. Now the common question among investors whether they should invest or not in this tax free bond issue.

Why you should invest ?

First of all it is ideal instrument for 30% or 20% tax bracket investors only. There is not much difference in different companies tax free bond. More or less almost all companies offer same return and for the security issue of your investment amount, these all issues are secured by government’s support. If you invest in bank fix deposit, the money insured up to Rs 1 lakh only. So for security of your investment amount these bonds have more score than bank fix deposit.
Interest income on these bonds being tax-free, the returns are higher than the after-tax returns on bank fixed deposits for investors in the 30 per cent tax bracket. The maximum highest interest rate available on bank deposits is 9.5 per cent compounded quarterly after tax adjusted return it gives 6.8% to 30 percent tax slab investor. So it is much lower than the REC tax free bond offer. It is the best option for 30% tax bracket investors. For 20 % tax bracket investor it is not much attractive for return wise but at the safety point of view they also can consider it. The interest rate on tax free bonds is also capped to the average G-Sec yield of the same maturity so there’s not much you can expect in terms of a better rate.

Features of REC Tax Free Bond Issue

There are two series of bonds, one with a 10 year maturity and another with a 15 year maturity and then there are 4 categories of investors that can invest in them. Retail investors are under category IV an get 7.72 % for 10 year and 7.88% for 15 years tenure.
It is available in both physical and dematerialized form. It means that no demat account is necessary to buy these bonds. Bonds will be listed within 15 days of closing of issue on both NSE and BSE. This bonds are exempt under Section 10 (15)(iv)(h) of the Income Tax Act 1961.
There are four categories of investors for these bonds and the last category of investors which is the retail category get a higher interest rate (half a percent). A retail investor is someone who invests less than Rs. 10 lakhs in these bonds.
It has got excellent rating from rating agencies. They have been rated CRISIL AAA/Stable by CRISIL, CARE AAA by CARE, IND AAA by IRRPL and ICRA AAA by ICRA. The interest on the REC tax free bonds will be paid once a year on December 1st.
If you purchase it from secondary market then you will get lower rate from primary market (directly from company) and this difference is half percent.
In the last I would like to say that it is good investment avenue for 30 % and 20% tax bracket investor. But keep in mind first plan your sec 80(c) tax deduction benefit and after that you should plan such types of bonds.

Regards,

Arvind Trivedi

Certified Financial Planner

arvind.trivedi79@gmail.com