Who Issues REC Bonds?
REC Bonds are issued by REC Limited, a Public Sector Undertaking (PSU) under the Ministry of Power. It is one of India's leading infrastructure finance companies, with a net worth of ₹58,121 crores (as of March 31, 2022). The main objective of REC is to finance and promote rural electrification, transmission, distribution and generation, including renewable energy projects all over India. It provides financial assistance to State Electricity Boards, State Government Departments, central/state power utilities, independent power producers, rural electric cooperatives, and private sector utilities through its extensive nationwide network of 22 state offices.
How do REC Bonds Work?
REC bonds are section 54EC bonds for investors earning long-term capital gains from selling their immovable property or shares. An investor can claim tax exemption under section 54EC of the Income Tax Act of 1961.
What are the features of REC Bonds?
Money to be invested
Only long-term capital gains arising from the transfer of long-term capital assets being immovable property within 6 months of the transfer can be invested in these Bonds.
Rate of interest
REC bonds provide an interest of 5.25% per annum as on April 1, 2023, which will be paid every year on June 30 until redemption, and the company will pay the balance interest along with redemption.
Minimum investment
An investor needs to make a minimum investment of ₹10,000. This means they have to buy at least one bond.
Maximum investment
An investor can buy a maximum of 500 bonds of ₹10,000 each, i.e., in a financial year, they invest up to ₹50 lakhs.
Listing in the stock exchange
REC Bonds are non-transferable and cannot be listed on any stock exchange.
Credit rating
REC Bonds have received an “AAA” credit rating from CRISIL and ICRA Limited.
Tenure
An investor needs to hold the investment in REC bond for at least five years from the deemed date of allotment to avail of the benefit under Section 54EC of the Income Tax Act of 1961.
Transferability
REC bonds are non-transferable and non-negotiable.
Refund/withdrawal of application money
Once credited to the REC 54EC Collection Account, the amount can’t be refunded. However, in case of rejection of the Application on account of technical grounds, at REC’s sole discretion, a refund without interest will be made.
Record date
The record date of interest shall be 15 days before each coupon payment date and 15 days before the redemption date. The company will pay the interest to the person whose name appears in the Register of Bondholders on the record date.
Advantages of REC Bonds
- An investor can claim exemption on long-term capital gains from immovable property.
- This holds if you invest in Bonds under Section 54EC within 6 months of transfer.
- REC Bond has received the highest credit from CRISIL and ICRA, which indicates the stability in the repayment of principal & interest thereon.
- Even though interest earned from REC bonds is taxable, no TDS is deducted from the interest.
- The Government of India backs REC bonds, as REC is a public sector entity. Therefore, the risk associated with the REC limited bonds is very less.
Disadvantages of REC Bonds
- As the bonds are non-transferable, these instruments aren’t marketable.
- Premature bond redemption is not permitted under any circ*mstances apart from death.
How to Calculate the Yield of REC Bonds?
Bond yield refers to the returns an investor will earn on investing in a particular bond, and the calculation involves two variables: annual coupon payment and current bond price.
Here is the bond yield formula:
As REC bonds are not marketable, the yield of the bond is equal to the annual coupon rate.
For instance, for a REC bond with a face value of ₹10,000 and an annual coupon of 5.25%, the annual coupon payment would be ₹525 (). The bond yield would be 5.25% ().
Who Should Invest in REC Bonds?
Only individuals, Hindu undivided families (HUFs), approved institutions and NRIs are eligible to invest in REC’s 54EC Capital Gain Bonds, considering all the conditions are met. Any investor who has earned long-term capital gain from an immovable property can invest in REC bonds to claim an exemption under section 54EC within six months from the day they earned the long-term capital gain.
