From My Desk
Date	02-Dec-2012
Subject	Better returns, low risk - REC Bond
Details	Power sector lender Rural Electrification Corporation (REC) has kick-started the tax-free bond season this fiscal for the public. Interest income on these bonds being tax-free, the returns are higher than the after-tax returns on bank fixed deposits for investors in the 30 per cent tax bracket. Currently, the highest rate on bank deposits is 9.5 per cent. For an investor in the 30 per cent tax slab, the after-tax return is 6.8 per cent, lower than what the REC tax-free bonds offer. But for an investor in the 20 per cent tax bracket, the after-tax return works out to 7.82 per cent. This is higher than the REC 10-year bond (7.72 per cent), but lower than the 15-year bond return (7.88 per cent). While bank depositors’ money is insured up to Rs 1 lakh in each bank, REC’s tax-free bonds are secured, have the government’s support, and the highest credit ratings, making the whole investment safe. So, even retail investors in the 20 per cent tax slab can consider sacrificing a little return for more safety and invest in the bonds. Also, with a possible increase in their income, investors in the 20 per cent tax slab now may move to the 30 per cent bracket in the future. Given the long tenure of the REC bonds, such investors can consider investing in these bonds. While non-resident Indians (NRIs) are eligible for investing in the bonds, they would be better off investing in NRE fixed deposits with banks which offer rates of around 9 per cent, tax-free. The bond can be redeemed in secondary market before time . Long term capital gain to be taxed at 10% without indexation or 20% with Indexation.
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