REC Tax Free Bonds: A must subscribe offer

Investment

oi-Sunil

By Sunil Fernandes

Published: Tuesday, September 3, 2013, 10:32 [IST]

The interest rates on the REC Tax Free Bonds are perhaps the highest for a tax free bond issue seen in recent years, which makes the issue a must subscribe for those paying higher taxes.

The Bonds are currently open for subscription and will close on September 23, 2013

Tax free income

Remember that the interest earned on these bonds are tax free. This means that you do not have to add your interest income from these bonds to your total income to compute tax liability.

Interest rates

For retail investors, the bonds carry tax free coupon of 8.26%, 8.71% and 8.62% for tenure of 10 years,
15 years and 20 years, respectively.

Why you should invest if you are already paying taxes?

Now let's assume that the individual is in the highest tax bracket ((30.9% tax rate), his pre-tax yield on the bond works out to 11.96%, 12.64% and 12.52% for 10 years, 15 years and 20 years, respectively. Now, the maximum a Bank fixed deposit can offer you is 9.25%.

Now, let's assume you are in the 20% tax bracket. Your effective yield by way of interest on the bonds works out to 9.9% for 10 years, 10.45% for the 15 year bond and 10.33% for the 20 year bond. This is again higher then bank fixed deposits.

Highest rating and government enterprise add to safety

REC is a Central Government Navratna enterprise and hence the bonds are extremely safe. They are also AAA rated, which indicates a very high safety.

Who can invest?

Non-resident Indians, qualified foreign investors, retail individual investors and Hindu undivided families (HUFs) through their Kartas.

With bond yields falling, it is possible that the future tax free issuances may not be able to offer such high interest rates, which makes the issue of REC, a must subscribe.

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