• Investment World
• eWorld
• Catalyst
• Mentor
• Life
• Canvas
• Praxis
• Urban Pulse
• Brand Quest

Sowmya Krishnan

RURAL Electrification Corporation (REC) has come out with an issue of tax-saving infrastructure bonds, which is on tap (available anytime across the counter).

Investors seeking to utilise the additional Rs 30,000 qualifying limit for investments in infrastructure bonds now have an option apart from IDBI Flexibonds, and ICICI Infrastructure Bonds. (ICICI is yet to come out with its infrastructure bonds for this year).

Scheme features

The REC bond offers a coupon of 8 per cent per annum, payable annually. Investments qualify for the extra ceiling of Rs 30,000 available for investments in infrastructure bonds. Interest paid on the bond qualifies for deduction under Section 80 L of the Income-Tax Act, which means the interest earned on the REC bonds can be included in the maximum limit of Rs 12,000 that is eligible for deduction while computing the total income.

It is a five-year bond with a put option after three years. The put option allows an investor to sell the bond to the company, and liquidate his holdings after three years.

An incentive at the rate of 0.375 per cent for investments up to Rs 20,000, and 0.50 per cent for above Rs 20,000 is payable by REC along with the first interest payment.

Assuming the investor exercises the put option after three years, Rs 5,000 invested in the REC bonds would give a post-tax yield of 16 per cent for three years.

Competing investments

The REC option would be a great relief to investors who already have a fairly large exposure to ICICI and IDBI infrastructure bonds.

Till the year before last, only these two financial institutions issued tax-saving bonds, and dearth of investment options that qualify for the additional tax rebate forced investors to take large exposures in them.

Now, investors can diversify their portfolio, and invest a larger portion in REC bonds.

Investors now have two options to avail themselves of the additional rebate available for infrastructure bonds — the REC bonds and the IDBI infrastructure bonds.

Though the REC bond offers a lesser rate than the IDBI infrastructure bond of 8.5 per cent (it also is on tap), investors can consider the former for portfolio diversification. ICICI is expected to come out with its offer soon.

Investors, who have only recently started investing in tax-saving schemes, may not find the REC bond as attractive as the IDBI, which offers 50 basis points more than the REC instrument.

Investors in this category can allocate a portion of their planned investments to the IDBI and REC bonds, and wait a few more months for the ICICI option.

Investors can curtail their investments in infrastructure bonds to the additional limit of Rs 30,000 in order to prevent concentration of investments, year after year, in few avenues.

They can invest in other instruments such as the NSC, NSS, PPF and life insurance up to Rs 70,000 to get the full rebate. Investors who fall in the above Rs 5 lakh tax bracket are not eligible to claim rebate under Section 88.

Without the tax benefit, from an interest rate point of view, these bonds stand on a par with those offered by bank fixed deposits.

Hence, the bonds may appeal only to a conservative investor.

From a risk point of view, REC being a Centre-owned entity is safer, as the issue comes with government guarantee.

Send this article to Friends by E-Mail
Comment on this article to BLFeedback@thehindu.co.in

Stories in this Section
Indal: Smelt the metal

Copyright © 2002, The Hindu Business Line. Republication or redissemination of the contents of this screen are expressly prohibited without the written consent of The Hindu Business Line