REC opens its Public Issue of Tax Free Bonds tomorrow i.e. Oct 27, 2015.
This is the 3rd such issue this year.
In the last few weeks, NTPC and PFC have raised Rs.700 crores each. Both issues received a stunning response. REC too has been approved to raise Rs.700 crores from the public, thru' the tax free bonds.
These are, of course, the smaller issues. The big ones are still awaited.
The largest issues of tax free bonds, expected in the coming weeks and months, include
- National Highways Authority of India (NHAI) : Rs.24,000 crores
- Indian Railway Finance Corporation (IRFC) : Rs.6,000 crores
- Housing and Urban Development Corporation (HUDCO) : Rs.5,000 crores
- Indian Renewable Energy Development Agency (IREDA) : Rs.2,000 crores
Bond Tenure : 10 years, 15 years and 20 years
Face value : Rs.1,000 per bond
Minimum subscription : Rs.5,000 (5 bonds of Rs.1,000 each)
Issue period : Oct 27, 2015 to Nov 4, 2015 (with an option for early closure or extension)
Rate of interest :
10-yr bonds - 7.14%. 15-yr bonds - 7.34%. 20-yr bonds - 7.43% [For retail investors]
10-yr bonds - 6.89%. 15-yr bonds - 7.09%. 20-yr bonds - 7.18% [For others]
Interest payment : Payable annually
Retail Investors : Individuals, HUFs and NRIs (on non-repatriation basis) investing up to Rs.10 lakhs.
High Net Worth Individuals : Individuals, HUFs and NRIs (on non-repatriation basis) investing more than Rs.10 lakhs.
Issue size : Base amount = Rs.300 crores; Over-subscription = Rs.400 crores. Total size = Rs.700 crores.
Allotment : 40% of the issue size reserved for retail investors which will be allotted on 'First Come First Serve Basis'
Rating : CRISIL AAA/Stable, ICRA AAA, CARE AAA and IND AAA/Stable [These ratings indicate the highest degree of safety regarding timely servicing of the debt and lowest credit risk.]
Liquidity : To be listed on BSE
Loan : Borrowing permitted by pledging these bonds
Put / Call : No put or call option
Form : In Physical and Dematerialized form
Nomination : Allowed
Permanent Account Number (PAN) : Mandatory
Note:
1. Since trading in bonds is normally not very active, don't expect too much liquidity when listed. Therefore, if you can afford to lock-in your money for 10/15/20 years, this makes a good choice to earn tax-free income.
2. The tax-free aspect is only for the interest income. If you sell before maturity, the capital gains will be taxable. Short-term capital gains will be added to your income and taxed as per your slab rate. Long term capital gains will be taxed @10%. These bonds are NOT eligible for indexation benefit.
IMPORTANT
The interest rates on tax-free bonds are fixed, based on the G-Sec (Govt. Securities) interest rates prevailing around the time of the public issue.
As I had mentioned earlier in Sept 2015, when the NTPC's Public Issue of Tax Free Bonds had opened, that there was a high probability that Reserve Bank of India may reduce the policy interest rates in the near future.
Subsequently, RBI has slashed the policy rates by 0.5%.
Therefore, as expected the market interest rates of G-Secs have dropped. This is reflected in the lower interest rates for the REC Public Issue as compared to the NPTC and PFC issues (7.36% / 7.53% / 7.62% for 10 / 15 / 20-yr bonds for the retail investors).
Given that the rate reduction by RBI was quite significant, no further moderation in interest rates is expected in the next few months.
Accordingly, the future issues of tax free bonds would be probably be around the same rates as the REC issue. As such, even if you miss allotment in this issue (which is one of the smallest ones), you can always apply in the bigger issues later.
MOST IMPORTANT
Of course, as I have repeatedly advised
a) You can always invest in tax free bonds through the secondary market. [Still Craving For Tax Free Bonds?]
OR
b) You can totally skip the tax free bonds [Why Tax-Free Bonds Don't Excite Me?]
This is the 3rd such issue this year.
In the last few weeks, NTPC and PFC have raised Rs.700 crores each. Both issues received a stunning response. REC too has been approved to raise Rs.700 crores from the public, thru' the tax free bonds.
These are, of course, the smaller issues. The big ones are still awaited.
The largest issues of tax free bonds, expected in the coming weeks and months, include
- National Highways Authority of India (NHAI) : Rs.24,000 crores
- Indian Railway Finance Corporation (IRFC) : Rs.6,000 crores
- Housing and Urban Development Corporation (HUDCO) : Rs.5,000 crores
- Indian Renewable Energy Development Agency (IREDA) : Rs.2,000 crores
REC's Public Issue of Tax Free Bonds
REC (Rural Electrification Corporation) is a Govt. of India enterprise. The details of its public issue of Tax Free Secured Redeemable Non-Convertible Bonds, for the financial year 2015-16, are given below:Bond Tenure : 10 years, 15 years and 20 years
Face value : Rs.1,000 per bond
Minimum subscription : Rs.5,000 (5 bonds of Rs.1,000 each)
Issue period : Oct 27, 2015 to Nov 4, 2015 (with an option for early closure or extension)
Rate of interest :
10-yr bonds - 7.14%. 15-yr bonds - 7.34%. 20-yr bonds - 7.43% [For retail investors]
10-yr bonds - 6.89%. 15-yr bonds - 7.09%. 20-yr bonds - 7.18% [For others]
Interest payment : Payable annually
Retail Investors : Individuals, HUFs and NRIs (on non-repatriation basis) investing up to Rs.10 lakhs.
High Net Worth Individuals : Individuals, HUFs and NRIs (on non-repatriation basis) investing more than Rs.10 lakhs.
Issue size : Base amount = Rs.300 crores; Over-subscription = Rs.400 crores. Total size = Rs.700 crores.
Allotment : 40% of the issue size reserved for retail investors which will be allotted on 'First Come First Serve Basis'
Rating : CRISIL AAA/Stable, ICRA AAA, CARE AAA and IND AAA/Stable [These ratings indicate the highest degree of safety regarding timely servicing of the debt and lowest credit risk.]
Liquidity : To be listed on BSE
Loan : Borrowing permitted by pledging these bonds
Put / Call : No put or call option
Form : In Physical and Dematerialized form
Nomination : Allowed
Permanent Account Number (PAN) : Mandatory
Note:
1. Since trading in bonds is normally not very active, don't expect too much liquidity when listed. Therefore, if you can afford to lock-in your money for 10/15/20 years, this makes a good choice to earn tax-free income.
2. The tax-free aspect is only for the interest income. If you sell before maturity, the capital gains will be taxable. Short-term capital gains will be added to your income and taxed as per your slab rate. Long term capital gains will be taxed @10%. These bonds are NOT eligible for indexation benefit.
IMPORTANT
The interest rates on tax-free bonds are fixed, based on the G-Sec (Govt. Securities) interest rates prevailing around the time of the public issue.
As I had mentioned earlier in Sept 2015, when the NTPC's Public Issue of Tax Free Bonds had opened, that there was a high probability that Reserve Bank of India may reduce the policy interest rates in the near future.
Subsequently, RBI has slashed the policy rates by 0.5%.
Therefore, as expected the market interest rates of G-Secs have dropped. This is reflected in the lower interest rates for the REC Public Issue as compared to the NPTC and PFC issues (7.36% / 7.53% / 7.62% for 10 / 15 / 20-yr bonds for the retail investors).
Given that the rate reduction by RBI was quite significant, no further moderation in interest rates is expected in the next few months.
Accordingly, the future issues of tax free bonds would be probably be around the same rates as the REC issue. As such, even if you miss allotment in this issue (which is one of the smallest ones), you can always apply in the bigger issues later.
MOST IMPORTANT
Of course, as I have repeatedly advised
a) You can always invest in tax free bonds through the secondary market. [Still Craving For Tax Free Bonds?]
OR
b) You can totally skip the tax free bonds [Why Tax-Free Bonds Don't Excite Me?]
