REC tax-free bonds are open today for subscription. Should you invest in them? Before you make up your mind, do a quick math to know where the returns offered by REC stand compared with fixed deposits.
What are tax-free bonds?
Tax-free bonds are non-convertible debentures that offer interest income that is free of tax. There is no tax deduction for the principal amount that you invest. This is, therefore, not to be confused with tax-saving bonds such as infrastructure funds. The government approves only few institutions such as NHAI , Power Finance Corporation, Indian Railways Finance Corporation or Rural Electrification Corporation (REC) to issue tax-free bonds.
Features
Tax-free bonds are normally bought only through demat account. But REC has offered investors the option of applying in both physical and demat form. REC bonds have an annual interest payout of 7.72 per cent (for retail investors and HUFs up to Rs 10 lakh) for 10 years and 7.88 per cent for 15 years. The interest rate is lower by 0.5 percentage points for other categories of investors. There is no cumulative option available in tax-free bonds. Interest is paid out every year on December 1.
The bonds will be listed on the stock exchanges and can be sold before maturity if they are in demat. But capital gains tax will be applicable in such a case.
How does the rate fare
Since the bonds have a fixed interest payout option, you will have to compare it with safe fixed deposits of banks. Currently, a 10-year bank deposit offers a maximum of 8.75 per cent. Post tax, at the 30 per cent and 20 per cent bracket, the returns are lower than what is offered by REC for 10 years (see table). That means, except for those in the 10 per cent tax bracket, REC bond is suitable for the rest. This is the case even if you compare the bond rate with a 5-year bank FD.
The bond is therefore suitable for those in the high tax bracket and for those looking for a regular income stream.
| 10-year bank FD of 8.75% | 5 -year bank FD of 9.5% | 10-year REC of 7.72% | |
| Post-tax return (%) | Post tax return(%) | Post tax return(%) | |
| Tax @ 30% | 6.12 | 6.65 | 7.72 |
| Tax @ 20% | 7.00 | 7.60 | 7.72 |
| Tax @ 10% | 7.87 | 8.55 | 7.72 |
The offer is open from December 3-10 but can be pre-closed within three days of issue.
About the company
REC is a public sector company that finances rural electrification projects. Much of its loan book are secure in nature. It is also backed by the government. Its credit rating of AAA suggests high credit quality in terms of servicing its debt.
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but Vidya, REC has offered in both the modes, that is, physical and demat for the convenience of investors without demat account.
Yes, Arivind thanks for highlighting this. While other tax-free bonds were in Demat form, REC has chosen to give both in physical and demat. We will add this.
that’s the reason I love <a href="http://www.FundsIndiaAdvisors.com" and the people behind it for their open culture and acceptance to the hard facts
REC tax free bond is very good. But if I would like to take tax saving bond. Can you suggest such tax free bond present available or ensuing issue up to February, 2012?
Hi Maheshkumar, we will highlight it in this blog when tax-saving bonds come up for issue. There are none issued currently. Vidya
can a company buy REC bonds? will that be an investment or loan for the company?
the tax-free bond discussed in this article is closed. But yes, in general, companies and bodies corporate can buy tax-free bonds under Category II – non-institutional investor category. – Vidya
Dear Ms. Vidya,
Greeting!!!
Can you suggest me which is the best bond to invest in month of Jan-13 or Feb-13? Thanks.
Manish, what nature of bond are you looking for? Did you mean tax-saving bond? If so, right now IRFC is open and its rate is beneficial and for those in the 20-30 per cent tax bracket.- Vidya
Dear Vidya, Thanks for the reply, yes I am looking for tax saving bond.
Very good information, can I buy online? bcz i do not know any agent or agency.
Yes, you can buy online through FundsIndia if you have an account here. Other online mode will be online brokerage firms.
Dear Ms Vidya
My income is about 5.5 lakhs. I have a PPF account where I have made 70,000/- investment during this year. To get the maximum benefit of Rs. 100,000/- under 80C, I would like to invest in bonds or other instruments within this financial year. Please let me know the best options. I had purchased Infrastructure bonds in the past year but I am told it is not an option now.
Thanks in advance.
Hello sir, Hope you have considered any premium you pay on any life insurance schemes for Sec 80C purpose. Apart from your PPF, the options left for you are NSC, 5-yr tax-saving deposits. 5-yr post-tax NSC rates are currently (will change post March) superior to tax-saving deposits. Other than this, there is Equity linked savings scheme – ELSS from mutual funds, if you will invest in equities. Otherwise, there are no tax-saving bonds under Sec 80C nor any infrastructure bonds in the current year. Tax-free bonds do not provide 80C benefits. Their interest income is tax free; that’s all. Tks, Vidya
Dear mam,
is it require to show the income from interest on tax saving fixed deposit for 5 years lock-in period in income tax return .Is the income from this interest is tax free or not?
hello Manish, Interest on tax-saving deposit is taxable. You can show it as accrual at the end of fifth year if no TDS is deducted now. If TDS is deducted every year, then it may be better to show it annually.
I am looking after to purchase the GOI bonds whoseinterest is tax free .Kindly indicate ihow I can purchseold such bond maturing in next 1-2 years.Howwill the tax liability will be valculated.
Thanks
NirmalSahni
Hello sir, You will have to only buy tax-free bonds that are traded in the stock exchange because other tax-free bonds have a 10-15 year maturity. Even then, you may not get those maturity within the next 2 years as mmost issues are only a few years old. The listed debt market is quite illiquid and hence may not be easy. thanks, vidya
but Vidya, REC has offered in both the modes, that is, physical and demat for the convenience of investors without demat account.
Yes, Arivind thanks for highlighting this. While other tax-free bonds were in Demat form, REC has chosen to give both in physical and demat. We will add this.
that’s the reason I love <a href="http://www.FundsIndiaAdvisors.com" and the people behind it for their open culture and acceptance to the hard facts
Dear Ms. Vidya,
Greeting!!!
Can you suggest me which is the best bond to invest in month of Jan-13 or Feb-13? Thanks.
Manish, what nature of bond are you looking for? Did you mean tax-saving bond? If so, right now IRFC is open and its rate is beneficial and for those in the 20-30 per cent tax bracket.- Vidya
Dear Vidya, Thanks for the reply, yes I am looking for tax saving bond.
Very good information, can I buy online? bcz i do not know any agent or agency.
Yes, you can buy online through FundsIndia if you have an account here. Other online mode will be online brokerage firms.
can a company buy REC bonds? will that be an investment or loan for the company?
the tax-free bond discussed in this article is closed. But yes, in general, companies and bodies corporate can buy tax-free bonds under Category II – non-institutional investor category. – Vidya
Dear Ms Vidya
My income is about 5.5 lakhs. I have a PPF account where I have made 70,000/- investment during this year. To get the maximum benefit of Rs. 100,000/- under 80C, I would like to invest in bonds or other instruments within this financial year. Please let me know the best options. I had purchased Infrastructure bonds in the past year but I am told it is not an option now.
Thanks in advance.
Hello sir, Hope you have considered any premium you pay on any life insurance schemes for Sec 80C purpose. Apart from your PPF, the options left for you are NSC, 5-yr tax-saving deposits. 5-yr post-tax NSC rates are currently (will change post March) superior to tax-saving deposits. Other than this, there is Equity linked savings scheme – ELSS from mutual funds, if you will invest in equities. Otherwise, there are no tax-saving bonds under Sec 80C nor any infrastructure bonds in the current year. Tax-free bonds do not provide 80C benefits. Their interest income is tax free; that’s all. Tks, Vidya
REC tax free bond is very good. But if I would like to take tax saving bond. Can you suggest such tax free bond present available or ensuing issue up to February, 2012?
Hi Maheshkumar, we will highlight it in this blog when tax-saving bonds come up for issue. There are none issued currently. Vidya
I am looking after to purchase the GOI bonds whoseinterest is tax free .Kindly indicate ihow I can purchseold such bond maturing in next 1-2 years.Howwill the tax liability will be valculated.
Thanks
NirmalSahni
Hello sir, You will have to only buy tax-free bonds that are traded in the stock exchange because other tax-free bonds have a 10-15 year maturity. Even then, you may not get those maturity within the next 2 years as mmost issues are only a few years old. The listed debt market is quite illiquid and hence may not be easy. thanks, vidya
Dear mam,
is it require to show the income from interest on tax saving fixed deposit for 5 years lock-in period in income tax return .Is the income from this interest is tax free or not?
hello Manish, Interest on tax-saving deposit is taxable. You can show it as accrual at the end of fifth year if no TDS is deducted now. If TDS is deducted every year, then it may be better to show it annually.