Fintotal News Analysis | REC Tax Free Bonds Tranche 2- February 2013. What is it About?
REC Tax Free Bonds Tranche 2- February 2013. What is it About?
Ruby Jacob, 23 Feb 2013

Rural Electrification Corporation's 2nd lot of tax-free bonds are up for subscription and the tranche-2 issue will be open from 25 February 2013 to 15 March 2013. It had raised funds in early December in tranche I of its tax free bonds.

Why is REC issuing bonds?

REC is a PSU company that promotes and finances electrification projects for rural India. It provides loan assistance for funding schemes of government power utilities. Some of its funds are raised from the market in the form of bonds. REC will raise about Rs 100 crores in tranche II of these series.

Are REC tax free bonds safe?

Yes, we are quite comfortable with the rating it has got from the rating agencies. REC is a wholly owned company of the government of India.

What are the returns in REC Tranche II bonds?

Coupon rate

10 years bonds- 7.38%

15 years bonds- 7.54%

Interest will be paid on December 1st of every year. If you sell the bonds to another person interest rate received by that person will be lower. If your application is less than Rs 10 lacs you come under retail category (category IV). The minimum application amount is Rs 5000 and the face value of each bond is Rs 1000.

Can NRIs apply for these bonds?

No, NRIs cannot apply for Tranche 2 of REC bonds.

How to apply for REC Tranche II Bonds?

Application of REC bonds can be made in demat form or physical form. Application can also be made in ASBA or non-ASBA mode.

Applications must be made only in the prescribed Application Form. You can download the forms or apply online through SBI Capital Markets, A K Capital Services, Axis Capital, ICICI Securities or Kotak Mahindra Capital.

What is tax free in REC tax free bonds?

Here is where you need to pay good attention. Firstly it has nothing to do with tax rebate of Sec 80 CCF. Section 80 CCF (Rs 20,000) has been scrapped this year and you will not get any tax rebate on infrastructure bonds like the one you got last year. Hence please do not fall for this trap.

Now, what is tax free? Income is taxable. Similarly interest is treated as income and is taxable. For example one earns interest from his fixed deposits with banks and he needs to pay tax on it. But in the case of these bonds the interest you earn is tax free. The investment itself does not qualify for any rebate only the coupon interest is tax free. But in case you sell the bonds before maturity you need to pay capital gains tax. So you pretty much need to hold till maturity if you really wish to get tax free returns.

Is there any lock in REC bonds?

No, though the only way to exit is by way of selling it in the secondary market. These bonds are to be listed on BSE and NSE. But this does not make the bonds any liquid. Tax free bonds are not freely traded on the exchanges. You might be able to find buyers since once traded by the original bond holder they earn lower interest rate. Less volume of traded bonds mean you might not get good value for selling them. And even if you manage to, you'd have to pay capital gains tax.

Is it good to invest in REC bonds?

For retail investors, our take: avoid investing in RECbonds. The coupon rate of 7.54% may not beat inflation rate in the long term.  You will not be able to use the power of compounding as well. In fact debt mutual funds can do a better job for you.