REC Tax Free Bonds Review

by Manshu on March 4, 2012

in Fixed Deposits

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.

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