REC Tax Free Bonds Review

This post is the old post that talks about the REC 2011-12 issue, please read about the current REC tax free bonds 2012-13 issue here. 

REC (Rural Electrification Corporation) is going to issue tax free bonds and the issue will open on March 6 2012 and will close on the 12th of March 2012. They had issued infrastructure bonds earlier, and these tax free bonds should not be confused with them.

When you buy 80CCF infrastructure bonds, the amount you invest in those bonds get reduced from your taxable income but in these bonds that’s not going to be the case. The interest on these bonds will be tax free and they are similar to the other tax free bonds like the HUDCO, NHAI and PFC issues. For the two of you interested in knowing this – these bonds are tax free under Section 10(15)(iv)(h) of the Income Tax Act.

Now on to the issue itself and let’s start with the high credit rating that the issue has got. The REC tax free bond issue has been given the highest rating by all issuers since the government owns the majority stake (66.8%) in REC, it has been consistently profit making,  this is a secured issue, and it has also been granted the Navratna status by the government. The issue is rated  “CRISIL AAA/Stable” by CRISIL, “CARE AAA” by CARE, “Fitch AAA(ind)” by FITCH and “[ICRA]AAA” by ICRA.

This is a Rs. 30 billion or Rs. 3,000 crore issue and the minimum application size is Rs. 5,000 with each bond having a face value of Rs. 1,000.

There are two series which will pay interest every year and the maturity on one series is 10 years while the other one is 15 years. The interest rate is slightly higher for retail investors and retail investors are defined as resident investors who invest less than Rs. 1 lakh in the bond issue.

Unfortunately for NRIs, they can’t invest in this bond issue – the prospectus doesn’t explain why NRIs are barred from investing in these bonds.

These bonds will list on the BSE and will only be issued in dematerialized form. Here are the details on these bonds.


Options Bond Series 1 Bond Series 2
Tenor 10 years 15 years
Interest for Retail Investors 8.13% 8.32%
Interest for Other Investors 7.93% 8.12%
Face Value Rs. 1,000 Rs. 1,000

If you compare this with any of the earlier issues you will see that the interest rate offered is very similar, and I think these bonds make a good investment option for the fixed income part of your portfolio especially if you are in the 30% tax bracket. Some people have lamented the fact that the interest is not reinvested automatically and you will have to find alternate means to reinvest that interest and if you need the money 10 or 15 years from now and aren’t interested in any interest income then that’s probably valid (although you should consider inflation in that case and also read my detailed post with the comparisons)but other than that I think these tax free bonds offer a good opportunity to take advantage of the high interest rate environment that prevails today. I think the slowing economy is going to force RBI to bring down rates and these type of rates aren’t going to be on offer for very long so waiting for better rates is not be very prudent at this stage.

I’m sure a lively discussion is going to take place on listing gains in the comments section, but I am neither knowledgeable enough to say how much listing gains you can expect nor am I interested in these short term gains so I’m not going to be of any use there. Anything else, leave a comment and I’ll try to answer it.

101 thoughts on “REC Tax Free Bonds Review”

  1. Will two applications from a single investor be accepted for REC issue like it was in earlier isssues? Not able to search this on prospectus, anyone have any clue?

  2. I have applied 4 applications in REC bonds from my OD A/c @ 13.5% u today at 1 pm so that cheque is presented on Tuesday with following view
    1) See the rate of IRFC & other bonds post CRR cut.
    2) Last issuance of tax free bonds at high rate.
    3) Already healthy collections of 400 crores in retail category.
    4) Comparatively small issue size of 3000 crores
    5) Equivalent FD rates of 12 % fixed for 15 years.
    6) Listing expected in April coinciding with rate cut to be anounced by RBI on April 15.
    7) Incentive of 0.9 % & interest till allotment

    I think the issue may still remain open till mOnday.

    Views invited on the above as cheque will hit only on Tuesday( Shud I let the cheques issed from OD a/c pass),current GMP, interest rate scenario .

    Why 15 year IRFC bond is at par while 10 year one @ 1017-18 & any differentail between IRFC & REC.

    rec bonds closing tomorrow what to do finally shall i let the cheques paass?

  3. How much impact is the lower interest rate of 0.2 % due to step down clause ?

    Could it be as high as 40 rs i.e the difference between the average NHAI & IRFC listing rate?

  4. won’t it be a profitable proposition if we invest 5 lacs in REC bonds and earn about 2% after brokerage and tax? The question is: will this give 3% in near term? say in one month.

    1. Hi Mr. Raja… Going by the trend it is highly unlikely.. IRFC bonds today went below Rs. 1000. So there is no reason for REC bonds to list at a 3% premium until & unless there is a steep interest rate fall in the next one month.

      1. Dear Shiv,
        How much do you think would be the effect of 0.75% CRR cut announced by RBI on 9/3/12, on the listing of REC bonds ?
        Any idea about the retail subscription till today (9/3/12) ?

        1. Hi TCB

          It is definitely going to help all these bonds but not to a great extent as sooner or later it had to happen and it is already into the prices. Moreover, the bigger worries are arising from the crude price hike which has gone up from $90 odd levels to $105 levels. It has resulted in a possible fresh round of Petrol price hike in India. I expect REC bonds to list between Rs. 1000 & Rs. 1020 now.

          Subscription figures are available till March 8th and it was Rs. 209 Crores against Rs. 750 Crores in the Retail Investors category.

  5. // the amount you invest in those bonds get reduced from your taxable income but in these bonds that’s not going to be the case.
    Does this mean that there is no tax saving of INR 20,000/- ?

    1. I think you’re referring to 80CCF which allows you to deduct 20,000 from taxable income so the tax saving is actually 30, 20 or 10% of that.

  6. IRFC and HUDCO bonds had the step down clause i.e. if any one buys the bond in secondary market he would get the interest rate meant for institutional investor instead of that meant for retail investor. This is the primary reason why IRFC has listed at marginal premium as compared to NHAI which didn’t had any such clause. Do you know if there is such clause in REC bonds.

  7. Dear All Sirs,
    I want to invest RS.100000/- in REC tax free bond for 15 years.How much money will be yeilded after 15 years of investment.Pl guide me.
    Ejaz Husain

  8. Hi Manshu,
    I don’t understand demat very well. I have been comparing this plan with FD. The rate of interest etc are good but I am unsure how to sell the bond incase I need the money?
    I understand that it can be sold via the demat account, but it is easy enough to sell? And is there a chance of incurring losses if I have to sell it in an emergency?


    1. Hi Sanjay,

      You will have to open a trading and demat account and after that it is fairly easy to buy and sell but yeah the risk of incurring loss does exist. This will happen if future issues of similar nature come out at a higher rate of interest than this one and as a result these bonds start selling at a discount.

    1. I believe you can buy them using the Demat account but I think you won’t be able to sell them without a trading account or without the assistance of a broker. In this case, I think you’re better off investing in them and then rematerializing it.

  9. Hi Manshu… An important notification has come. The limit for the Retail Investors has been increased to Rs. 5 lakhs from Rs. 1 lakh earlier. Kindly take a note Mr. TCB.

    1. Thanks Shiv.
      Where are you getting all these notifications from? 🙂
      BTW, how was the response on the first day?

      1. Hi Amlan

        The notification is yet to show up on the I-T Department’s website. It is Notification No. 13, dated March 6th, 2012 and it’ll appear on the below pasted link whenever I-T dept. uploads it:

        Official first day figures are not out yet but the Retail response has been subdued due to a poor listing of IRFC Bonds. People who took financing for the IRFC issue have given more to their financiers and brokers than their actual profits post listing. The dreams they were shown by their brokers have not materialized and they are still selling their holdings in the secondary markets.

          1. IRFC bonds got listed on friday, March 2nd and no they did not list at a discount but a very marginal premium of Rs. 10 odd. Closing price yday was Rs. 1005.08. Actually, after the success of NHAI bonds, many retail investors were made to invest in IRFC bonds via financing route. They were shown profits of Rs. 10000-15000 on listing. They paid Rs. 3000-5000 in financing for a Rs. 5 lakh application but the listing gains barely covered financing cost and brokerage. That is the reason many of them are not very keen on investing in REC bonds.

            1. Dear Shiv,
              Do you think listing only on BSE is a negative factor for REC Bonds ? Just as PFC bonds listed only on BSE and having same coupan rate as NHAI bonds, are trading about Rs. 10-15 lower than NHAI bonds, REC bonds may also trade lower than IRFC bonds. Do you agree ? If yes, REC bonds may list at a discount, if IRFC bonds are trading around Rs. 1010 – 1015 on listing day of REC bonds. What do you think ?

              1. Hi TCB

                Yes, I think listing only on the BSE is a little bit of negative for any kind of security and it is probably contributing to the difference between NHAI & PFC as well. But, I dont think it is contributing 100% for the difference.

                Honestly speaking PFC Bonds have performed quite well, in fact more than my expectations, but the differnce between NHAI & PFC is also due to the problems that currently Power sector is facing due to a possible repayment defaults by the SEBs to these Power Finance cos. like PFC, REC, PFS, IFCI etc. and also due to coal shortages.

                Also, I think 8.32% for 15 years is a reasonably good rate of interest. Again, in a falling interest rate environment, I did not expect REC to fix such a good rate of interest. I expect HUDCO to list at a discount despite 8.35% interest rate but I hope REC would sail through and list at a marginal premium like IRFC has, between Rs. 1000 & Rs. 1010.

            2. Thanks for that info Shiv. This is a good example of why I stay away from listing gains as the same story repeated in stocks and now you see that repeating in bonds. The only way to win this listing gains game is to not play it.

              1. Hi Manshu

                Wish You, Your Family & OneMint Readers a Very Happy Holi !! 🙂

                The words are ‘Greed’ and ‘Fear’ which retail investors always carry and sensible investment decisions after gaining required knowledge which are always missing. I knew IRFC bonds will not list at a similar price at which NHAI bonds got listed because of the interest rate differential between first allottees and second allottees. But the problem actually started when the investors were made Greedy by their Brokers for earning financing income & extra commissions.

                This financing factor made “Hot Money” easily available to the retail investors and getting invested in the IRFC bonds. Because the investors have to sell on listing as these are leveraged positions, the prices do not reach their desired value levels. This is despite of a huge demand from QIBs & HNIs for IRFC bonds during the offer period.

                But one thing I want to say here that the Retail Investors also do not have a choice but to do things what they are doing. Personal Finance sections of newspapers, T.V. channels, various websites, magazines etc. keep on coming up with so many articles proving that Savings Bank deposits, FDs & Post Office schemes earn negative for the investors factoring the inflation factor. So, they try to act harder to beat inflation one way or the other.

                In that, if they try & succeed even once a year only, making 3-4% extra over & above 8-9% fixed income, then I think they should always look out for that. SBI Bonds have given approx. 14% returns in the last 11 months, NHAI bonds also have listed around 4% higher. But again, they should avoid ‘Greed’ & ‘Fear’, take sensible investment decisions after gaining the required knowledge and should not be guided by their brokers or agents for their investment decisions. They should consult a fee-based financial advisor who should not earn anything out of selling any of these products and be ready to shell out his/her professional fee.

                1. Happy holi to you and your family as well Shiv!

                  If people can manage gaining that extra income then that’s fine but I think they won’t be able to do that because if you invest in a string of these things for listing gains then you will ultimately end up making losses and it will wipe out earlier gains. Also, by not speculating like this you free up money that can go to work for you for longer durations and at a higher yield instead of looking for one hit gains.

                  1. Hi Manshu

                    That is what I want to say here. Retail Investors should not be a part of this herd. They should not speculate in a string of these issues rather should be very selective and make sensible investment decisions after gaining required knowledge. I did not make my clients invest a single rupee in Muthoot Bonds, IIISL Bonds or Manappuram Bonds. My clients suffered just a little bit in IFCI Bonds but that is due to lack of liquidity.

                    Money invested in some good issues like SBI Bonds or NHAI Bonds or Coal India IPO or MCX IPO are actually working for longer durations, giving listing gains and yielding high as well. So, the need of the hour is to make selected sensible investment decisions.

                    1. Shiv, I am just curious to know why you didn’t let your clients invest in Muthoot bonds….
                      Also, please let me know how I can invest in SBI Bonds.

                    2. I’m all for investing money in good companies that you want to hold on for a few years – that makes sense to me.

          2. should one repay the housing loan or invest in REC bonds?
            Housing loan rate 12%. Assume that he can claim loss from house property

      2. Hi Amlan… I did not stop them to invest in Muthoot Bonds but recommended not to go for it as I think the business model is too concentrated to give me the required confidence in it. Also, I want to check one bear phase in Gold Price Cycle to check the sustainability of this business model. I have a view that the gold prices have risen too soon too fast in he last 3-5 years and there is a bubble forming here.

        You can invest in SBI Bonds from the secondary markets like you buy shares.

  10. Dear Manshu,

    Can you please re-confirm that the bonds will not be issued in the form of physical certificates ? All earlier tax-free bonds had the option of getting the bonds in physical form.

    Also, retail limit was upto 5 lacs for all earlier issues. Has this been reduced for all future issues starting with this ?

    And, lastly, how much interest will a buyer from secondary market get ? Same as the original retail allotee or lower ?

    Please reply at the earliest

    1. Those are some good questions – this issue is different from the other ones and I’m not sure why that is. They aren’t allowing NRIs to invest in these bonds either which is another difference in addition to the ones you have pointed out.

      I double checked the dematerialized point and the prospectus says that the bonds will be issued in demat form first and then if people want it they can rematerialize it.

      The limit is down to 0.1 million or 1 lakh in this case, not sure what will happen later on.

      The secondary market owner will get a lower rate – not the same as the original allottee.


  11. Hi Manshu,
    Just curious about the listing of IRFC bonds. It listed couple of days back. The 7.90% interest 10 year bond is trading at Rs 1015 while the 8.1% 15 year bond is trading at 1005. I thought, being higher intereste rate and longer period, it should have traded at higher price. Could you please throw some light on this.

    1. I’m not very knowledgeable on this but I’d expect the higher interest rate one to be pricier, not sure why that’s not the case, probably just an anomaly due to lack of liquidity.

      1. Bond prices are inversely related to Interest Rate (Coupon). So higher interest rates mean lower trading prices.

        Think of it this way. There is a bond of face value 10000 which offers a fixed 8% per annum for the whole tenure. If you are to get an interest income of 4000 a year, you need to buy 5 bonds at face value or invest Rs. 50,000. If the market interest rate becomes 10%, for the same 4000 interest you will not be willing to shell out more than Rs.40,000 and thus the bond price will fall to 8000 as other alternative investments will give you the same interest.

        Similarly, if the interest rate in the market becomes 4%, for the same 4000 rupees interest annually, you will be willing to pay Rs. 2000 for the same bond.

      2. Hi Mr. Bhushan

        I think it is primarily because of the fact that Retail Investors mostly apply for 15 year bonds with higher interest rates and start selling them as soon as they list and keep on doing it till the supply becomes normal.

        Also, It is globally observed that 10 year bonds remain in high demand and most of the institutional investors & big investors invest in 10 year bonds. That is the reason they primarily go for 10 year bonds and not 15 year bonds. They dont apply in these bonds just for listing gains and hold on to their investments for a long term.

        It also depends on the yield curve. You can check the yield curve from the below pasted link:

        Observing the Indian Yield Curve, 15 year bonds ideally should trade at a premium, but I think due to the supply exceeding the demand in case of IRFC bonds, the 15 year bonds are trading at a discount to the 10 year bonds.

        1. The price movement of the bond is dependent on two factors.
          1. Interest Rate movement
          2. Tenure of the bond.

          As the market expects that the interest rate on a 15 year bond to be more than the interest rate for 10 year bond, 15 year bond will be at lower price than 10 year bond. Just to illustrate with a simple example. Assume that the market interest rate for 10 year bond was 7.9% and market interest rate for 15 year bond was 8.1% and if both of them trade at same price, then yield on both the bonds will be same. For the 15 year bond to give higher yield, the bond has to trade lower to give higher mark to market yield.

  12. Hi – Do we know what is the tax treatment for these bonds? What happens to my tax liability if I buy these and say sell them 5 years later (I am not looking for short term gains)?

      1. For these bonds per current rules the capital gain tax is 10 %. Please read from the page 115 of prospectus I have reproduced over here

        “However as per third proviso to section 48 of Income tax act, 1961 benefits of
        indexation of cost of acquisition under second proviso of section 48 of Income tax
        Act, 1961 is not available in case of bonds and debenture, except capital indexed
        bonds. Thus, long term capital gain tax can be considered 10% on listed bonds
        without indexation”

  13. I could see that NHAI, PFC, IRFC have already alloted the bonds. When will HUDCO allot ? Does any one have any information ?

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