Retail investors who were earlier dissuaded from investing in the tax-free bonds of the Rural Electrification Corporation (REC) because of a reduction in the investment limit from Rs 5 lakh to Rs 1 lakh, can now rejoice. The cap has been revised to Rs 5 lakh.
According to a press release sent to the stock exchanges, “any individual investor investing upto Rs 5 lakh shall be treated as retail investor and any individual investor investing more than Rs 5 lakh shall be treated as a high net worth individual”. This comes less than a month after the Central Board of Direct Taxes (CBDT) arbitrarily reduced the retail investor cap to Rs 1 lakh.
The Rs 1,500 crore REC bond issue opened on Tuesday with an option to retain oversubscription up to an aggregate of Rs 3,000 crore.
According to a Reuters report, the tax-free bonds have received bids worth more than 2.5 times the base size on the first day of opening.
The tax-free bonds offer a coupon rate of 8.13 percent (10 years) and 8.32 percent (15 years) for investments below Rs 5 lakh and 7.93 percent (10 years) and 8.12 percent (15 years) for investments above Rs 5 lakh.
From the present division of the Rs 5 lakh category, it seems clear that retail investors stand to gain 0.2 percentage points more by way of interest on investments of Rs 5 lakh and below.
Some points to ponder over :
• The REC issue is the first issue to shut out foreign institutional investors, non-resident Indians and overseas corporate bodies from participating, as per a Business Standard report.
•The income by way of interest on these bonds is fully exempt from income tax under Section 10(15)(iv)(h) of the Income Tax Act, 1961 and shall not form a part of the total income.
• The issue has a short shelf life and closes on 12 March. The earlier NHAI, PFC and Hudco tax-free bonds were open for longer periods.
• Key policy rates are expected to fall in the second half of the year, so investors are better of locking in at higher rates now.
• The minimum application size is Rs 5,000.
• The issue has been rated “AAA/Stable” by Crisil, Care and Icra.