Thursday, January 19, 2012

REC Long Term Infrastructure Bonds: 2011 – 2012 – Tranche 2


REC – Rural Electrification Corporation Limited has come up with new IPO of Long term Infrastructure Bonds that are available to the public between December 19th 2011 and February 10th of 2012. The purpose of this post is to raise awarness among people on these Infrastructure Bonds and the tax benefits they bring to us.

What are Infrastructure Bonds?

Infrastructure Bonds or Infra Bonds as they are shortly called are special Bonds that are issued by Banks in India to fund the rapid growth of the Infrastructure Industry in India. In one of my earlier posts titled “Should We Invest in the new Infrastructure Bonds that offer 80CCF Tax Benefits“ we had taken a detailed look at them. You can revisit that post to know more about these bonds by Clicking Here

Coming back to the topic, lets focus on these new Infrastructure bonds issued by REC now.

Details of the Issue:

Issue Start Date: December 19, 2011
Issue End Date: February 10, 2012
Issue Size: 100 Crores (Max)
Bond Face Value: Rs. 5000/- per bond
Minimum Purchase Amount: Rs. 5,000/- (1 Bonds)
Type of holding: Physical & DEMAT (You can Apply online through your DEMAT website like icicidirect)
Rate of Interest: 8.95% p.a for 10 year Bonds and 9.15% for 15 year Bonds
Interest Payment Options: Annual or Cumulative
Maturity Date: 10 years from the Date of Allotment or 15 years from the Date of Allotment
Maturity Amount: Rs. 11,783/- for 10 year Bonds and Rs. 18,592/- for 15 year Bonds
Lock-in Period: 5 years
Buyback Facility: Available at the end of 5 years One day from the Date of Allotment for 10 year Bonds and at the end of 7 years and One day for the 15 year Bonds

First things first – What are the Tax Benefits of Investing in these Bonds?

These long-term infrastructure bonds are useful to claim tax relief of up to Rs. 20,000/- under the Section 80CCF of the Indian Income Tax. i.e., If you buy 4 bonds of Rs. 5000/- each, that Rs. 20,000/- you invested in these bonds is exempt from your taxable salary.

So, for people in the highest tax slab the tax benefit they get is: Rs. 6,180/-

About REC Ltd:

Rural Electrification Corporation Ltd (REC) is one of India’s largest institutions. It is fully owned by the Government of India and is responsible for electricity transmission throughout the country. It is listed in the NSE and BSE exchanges.

About this Bond Issue:

This Bond Issue by REC has been rated as “AAA“ by ICRA, CARE and CRISIL India. As you might already know, AAA is the best possible rating any Issue can get and this Infra Bond’s issue by REC has got the same. So, this makes it a Prime Investment Option.

Interest Payment Options:

This Bond Issue has two modes of Interest Payment.
1. Annual Interest Payout
2. Cumulative Interest Payout


In the Annual option, the Interest amount earned in the year will be paid out every year to the Investor. At the end of 10 years, your initial investment of Rs. 5000/- will be returned. The interest paid will be as follows:

Rs. 447.5/- per Rs. 5000 Invested in the 10 year Bond
Rs. 457.5/- per Rs. 5000 Invested in the 15 year Bond

In case of the Cumulative option, the Interest is compounded every year and the total cumulative amount will be paid out at Maturity. The amount in this case for a Rs.5000/- Investment would be Rs. 11,783/- for 10 year Bonds and 18,592/- or the 15 year Bonds

About the Buy-Back Facility:

REC has indicated that Buy-Back Facility will be available after the day when 5 years and 1 day from the date of allotment of the bond for the 10 year Bonds and after the day when 7 years and 1 day for the 15 year Bonds. At that time, REC will buy-back these Bonds at the below mentioned prices if you are willing to sell.

Cumulative Interest Payout Option: Rs. 7677/- per bond for the 10 year Bonds at the end of 5 years
Cumulative Interest Payout Option: Rs. 9231/- per bond for the 15 year Bonds at the end of 7 years

Annual Interest Payout Option: Rs. 5000/- per bond for both 10 and 15 year Bonds

Dont forget the fact that REC has paid you an Interest of Rs. 447.5/- & 457.5 every year respectively for the 10 and 15 year bonds whereas for the Cumulative Interest Payout Option, nothing was paid to the Investor. So, his amount is bound to be highers than the amount for the Annual Interest Payout Investor.

Note: The amount above is if you surrender your bond for buy-back at the end of exactly 5 years and 1 day or 7 years and 1 day. If you wish to surrender anytime later, the amount might vary based on the duration.

Salient Features of the Issue:
1. Investments of upto Rs. 20,000/- are exempt from Income Tax under Sec 80CCF thereby saving Rs. 6180/- for Investors who fall in the highest tax slab of 30%. For someone in the 20% tax slab it would be Rs. 4120/- and for someone in the 10% tax slab the tax saving would be Rs. 2060/- respectively
2. Interest Rate of 8.95% for 10 year Bonds and 9.15% for 15 year bonds applicable for both annual and cumulative interest payout options
3. Buy-Back available after 5 years & 7 years. So, if you have better investment opportunities at the end of 5 or 7 years, you can sell them to REC and use the money to invest somewhere else
4. Minimum Investment is only Rs. 5,000/-
5. You can hold the Bonds in both Physical as well as DEMAT form
6. AAA rated Issue which means superb Safety & Security.
7. Interest rate offered is very good and if we club the tax saving we get out of this investment, the returns are the best in the markets for debt instruments


Some Questions that Might Arise in your mind about this issue – Answered:

1. Is the Annual Interest Payout better or the Cumulative one?

I would say Cumulative because, compounding of the Interest earned during each year increases the net effective returns and thereby making the cumulative option better

2. How Safe is my Money if I invest in this scheme?
Your money is fully safe. The Company is fully owned by the Government of India and hence our money is fully secure. That is why the AAA Rating.

3. What will this money be used for?
The money raised through this bond IPO will be used to fund and finance Infrastructure Projects in India.

4. Is Buy-Back the only option for me to sell these bonds after the lock-in period of 5 years?
No. The bonds will be listed in the NSE or BSE or both at the end of 5 years and can be bought and sold in the exchange

5. Can NRI’s Invest in these Bonds?
No. This issue is available only for Resident Indians. NRI’s cannot invest in these Bonds

Final Verdict:

In terms of the Issue, it is AAA rated, so safety is not a problem. Also, the rate of interest offered is higher than the other Infra Bonds available at the same time. It is issued by one of India’s largest company‘s. So, it looks like a sound investment decision. But, The Final Verdict depends on which Tax Slab you are in.

For someone in 30% Tax Slab: Excellent Opportunity to Save an Extra Rs. 6180/- Tax and enjoy good returns that work out to roughly 15% if we include the Tax Benefit earned along with the 8.7% interest offered by REC. So STRONG BUY.

For Someone in 20% Tax Slab: Great Opportunity to Save an Extra Rs. 4120/- Tax and enjoy good returns that work out to roughly 12% if we include the Tax Benefit earned along with the 8.7% interest offered by REC. So GOOD BUY.

For Someone in the 10% Tax Slab: Good Opportunity to Save an Extra Rs. 2060/- Tax and enjoy good returns that work out to roughly 10% if we include the Tax Benefit earned along with the 8.7% interest offered by REC. So BUY.


Happy Tax Saving!!!


7 comments:

  1. good info in understandable language..thanks

    ReplyDelete
  2. What is tax treatment of interest accrued in REC infra bonds (cumulative option). under which section it is covered

    ReplyDelete
    Replies
    1. Anonymous - The interest earned from bonds (any bond) has to be added to your income as "Income from other sources" and tax has to be paid according to the tax slab you fall into

      Delete
  3. what is the current face value of the Rs. 5000 bond now.

    ReplyDelete
    Replies
    1. Anonymous - The bond is not yet listed in any exchange. It will happen at the end of the initial 5 year period (After 2016) only.

      Delete
  4. Thanks for this useful blog...., Anand. I was wondering why my DEMAT account listing for REC shows NA for Market Rate.... and also no interest component added so far on the listing, and found this page, which claimed that we should reach the concerned authority for unpaid interest : http://www.recindia.nic.in/download/Infra_Unclaimed_Principal_Interest.pdf

    Could you clarify, whether that page is relevant for all the 2012 bond buyers too.

    ReplyDelete
    Replies
    1. It is showing NA because the bond isnt listed on any exchange yet. Maybe once it gets listed (After 2016) you will see the interest component also. Better talk to your DEMAT Acc provider about this

      Delete

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