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The REC deep low cost bonds, rated AAA by CRISIL Ratings, will likely be allotted to profitable bidders on October 3, 2024, in institutional market.
REC’s deep low cost bonds will mature on November 3, 2034.
Rural Electrification Corporation Limited (REC) is about to launch a uncommon and vital zero-coupon bond issuance, inviting bids on September 30, 2024. The bonds will mature on November 3, 2034. These bonds, rated AAA by CRISIL Ratings, will likely be allotted to profitable bidders on October 3, 2024, in institutional market.
What Are Deep Discount Bonds?
A deep low cost bond, such because the one REC is issuing, doesn’t pay curiosity all through the holding interval. Instead, the investor purchases the bond at a big low cost, and the issuer ensures reimbursement of a better quantity at maturity. For instance, if an investor purchases a bond for Rs 50,000 at this time, they are going to obtain Rs 1 lakh at maturity, relying on the low cost construction.
A comparable product out there is the Government Securities (G-Sec) STRIPS, that are additionally zero-coupon bonds. G-Sec STRIPS operate equally to deep low cost bonds, the place the beneficial properties are handled as long-term capital beneficial properties, and buyers solely pay taxes upon maturity. This is useful for Ultra-
HNI
s, as they keep away from annual tax liabilities, which usually apply to devices like Fixed Deposits (FDs) that accrue curiosity revenue every year and are taxed yearly.
Deep Discount Bonds: Tax Efficiency and Appeal
The Central Board of Direct Taxes (CBDT) has granted REC permission to problem these deep low cost bonds with favorable tax remedy. Instead of being taxed as curiosity revenue yearly, the beneficial properties will likely be taxed as long-term capital beneficial properties upon maturity. This construction is especially enticing to excessive networth people (
HNI
s) and household places of work, because it permits the investor to defer tax funds till the bond matures, offering a tax-efficient funding choice. The complete permissible increase via this issuance is Rs 2,517.85 crore, with a face worth of Rs 5,000 crore.
Example of Tax Benefits
Let’s assume an investor earns 7% curiosity on a Rs 100 funding. If they’re within the highest tax bracket, they might usually pay round Rs 3 in taxes on the Rs 7 curiosity revenue every year. However, with REC bonds or G-Sec STRIPS, the tax on this curiosity revenue is deferred. The Rs 3 tax that may in any other case be paid every year may be reinvested on the similar 7% fee, permitting the investor to earn curiosity on this deferred tax. Over a 10-year holding interval, this leads to considerably greater general returns in comparison with different interest-bearing devices, reminiscent of FDs, the place taxes are deducted yearly.
Market Potential and Liquidity
These REC deep low cost bonds will likely be listed on each the BSE and NSE money segments, permitting retail buyers to commerce them simply. Moreover, given their liquidity, REC bonds could commerce at yields decrease than comparable G-Sec STRIPS, but nonetheless supply enticing pre-tax returns of over 9%, assuming they are often bought at a yield of round 6.5%.
Deep Discount Bonds: Should You Invest?
Due to their tax effectivity and the potential for enticing returns, these deep low cost bonds are anticipated to be in excessive demand, notably amongst tremendous
HNI
s and household places of work. The means to defer tax funds till maturity, mixed with sturdy credit score rankings and liquidity, makes these bonds a compelling funding various for these searching for long-term capital development.
Suresh Darak, founder & director of Bondbazaar, mentioned, “REC’s upcoming deep low cost bond issuance is a uncommon and charming alternative for high-net-worth buyers searching for tax-efficient and long-term development. With beneficial tax remedy granted by the CBDT, buyers can defer tax funds till maturity making these bonds particularly enticing in comparison with conventional interest-bearing devices.”
Rated AAA by CRISIL and with a maturity of November 2034, these bonds supply sturdy credit score safety mixed with liquidity. These bonds will likely be listed on each the BSE and NSE money segments permitting retail buyers to commerce them simply, he added.
“Moreover, given their liquidity, REC bonds could commerce at yields decrease than comparable G-Sec STRIPS but nonetheless supply enticing pre-tax returns of over 9% assuming they are often bought at a yield of round 6.5%. This will certainly assist buyers targeted on capital development notably to
HNI
s and household places of work,” Darak mentioned.
