The Central Board of Direct Taxes (CBDT) has issued a notification related to ‘new Tax Free Bonds FY 2015-16’ in the month of July 2015. As per this notification, Tax Free Bonds (TFBs) to the tune of Rs 40,000 crore, will hit the market in this Financial Year (2015-16).
During the last few weeks, NTPC (National Thermal Power Corp) and PFC (Power Finance Corporation) have come up with Tax Free Bond issues. Both these issues were oversubscribed. Infact NTPC’s bonds issue was oversubscribed by 11 times on the very first day of the subscription.
Now, ‘REC Tax Free Bonds 2015’ is the latest issue which is going to be open for subscription from 27th October 2015. This issue is offered by Rural Electrification Corporation (REC).
REC is a Government of India owned company. It provides loan assistance to State Electricity Boards/State Power Utilities for investments in rural electrification schemes. It also offers loan products for financing Renewable Energy projects.
What are Tax-Free Bonds?
Let us first understand, what is a Bond?
A bond is a Fixed Income security (debt investment) in which an investor loans money to an entity (typically corporate or governmental / PSUs) which borrows the funds for a defined period (tenure)of time at a variable or fixed interest rate (coupon rate).
Those bonds which are exempt from taxation on the ‘interest income’ under the Income Tax Act, 1961 are called Tax-free bonds. These are usually issued by government-backed entities.
REC Tax Free Bonds 2015
Below are the features of REC Tax Free Bonds issue;
- Bonds Issue opens on : 27th Oct, 2015.
- Issue closes on : 4th November, 2015.
- Issue size : Rs 700 crore (max).
- Face Value : Rs 1,000 per bond.
- What is the minimum application size? : 5 bonds (Rs 5,000) per individual and in the multiple of 1 bond (Rs 1,000) thereafter.
- What is the maximum application size? : The maximum amount that an individual can apply is Rs 10 Lakh (Retail Category).
- REC Tax free bonds will be listed on BSE (Bombay Stock Exchange).
- Credit Rating : AAA (The bonds with such ratings are considered to have high degree of safety regarding timely servicing of financial obligations and carry very low credit risk.)
- Allotment is done based on ‘first come first serve’ basis.
- There is no put or call option in the issue.
- NRIs (Non-Resident Indians) are eligible for subscription.
Coupon Rates of REC Tax Free Bonds 2015
Below are the interest (coupon) rates that are offered for retail investors. Retail Option is for individuals whose application is for Rs 10 lakh or less ;
- On 10 year duration bonds the Coupon rate is 7.14%.
- On 15 year duration bonds the Coupon rate offered is 7.34%.
- On 20 year duration bonds the Interest rate is 7.43%.
(Investors who apply for bonds worth above Rs 10 Lakh & also NRIs would get 0.25% less interest rate when compared to the above rates.)
How to apply / invest in REC Tax Free Bonds 2015?
Unlike NTPC Tax-Free Bonds, REC Tax-Free Bonds will also be issued in Physical Form i.e. you can subscribe either in Physical or Demat mode.
Download REC Tax Free Bonds 2015 issue’s Application Form for Resident Indians.
Download REC Tax Free Bonds 2015 issue’s Application Form for NRIs.
Tax Free Bonds & Tax Implications
Interest income earned on Tax free bonds is exempted from taxes. Since the interest income on the bonds is exempt, no tax deduction at source (TDS) is required. Although, the interest received on TFBs is exempted, the investor would still be required to disclose it in his/her Income Tax Return as an ‘exempted income’. Tax free bonds are not eligible for deduction under section 80c.
Are Capital Gains taxes applicable on Tax free bonds? – Though the interest earned on these bonds is tax-free, any capital gain from sale in the secondary market is taxable. If you sell your Bond for a price that is more than the cost then you would have to consider this as a capital gain. Short-term capital gains from sale of tax-free bonds on exchanges are taxed at your income tax slab rate, while long-term capital gains are taxed at 10% without indexation.
The indexation benefit is not available for Bonds/NCDs (Non Convertible Debentures). (For STCG holding period is less than 12 months. For LTCG holding period should be more than 12 months.)
My opinion on REC Tax Free Bonds 2015 issue
- It is advisable to follow the principle –Think beyond taxes when investing. Do not invest in Tax-Free bonds just because the interest income is tax free. Your investment should match your financial goals requirements.
- If you have time on your side (young or have long-term goals), equity oriented investment avenues (shares, mutual funds etc.,) are the best bets to realize your financial goals.
- Though these Tax free bonds are listed on stock exchanges, for ‘liquidity’ purposes the issue size is an important factor to watch out for. REC’s latest issue size is Rs 700 crore only. Due to lower issue size, liquidity may dry down making it tough for investors to exit pre-maturely.
- The interest rates offered by NTPC & PFC Tax free bonds issues were 7.62% and 7.6% respectively. Whereas, REC is offering the coupon rate of 7.43% (20 year bond) only. This is a clear indication that we can expect reduced interest rates in the future tax free bond issues in this fiscal.
- If you are in 10% or 20% income slab rate, it may be prudent to ignore TFBs.
- Invest in this issue only if your income tax slab rate is at 30% and you want a steady source of income periodically over a long-term. Also, consider investing only a small portion of your savings towards these bonds.
Do you think one should invest in Tax free bonds? Kindly share your views and comments on REC Tax Free Bonds 2015 issue.