Govt asks REC to use IRFC's quota of tax-free bonds

Rural Electrification Corporation has received a bonanza from the government in the form of a Rs 3,000-crore, tax-free bond window for this year. The window was created by the Indian Railways, which has not used its entire quota of tax-free bonds.

REC would launch the tax-free issue by early March, director (finance) H D Khunteta told Business Standard. So far, the company has raised Rs 22,000 crore this year. “The government has included us in the list for tax-free bonds for the first time,” said Khunteta.

A senior finance ministry official told Business Standard the railways had conveyed it did not want to raise any more money this year. This followed the Indian Railways Finance Corporation (IRFC) raising Rs 7,031 crore under the tax-free route. “The railways had earlier asked for rolling over the unutilised Rs 3,000-crore window to the next year, but the government decided to let REC utilise this in the current year,” he said.

The railways borrows money through IRFC, but has reduced its borrowings this year after a 16 per cent cut in its Plan size for 2011-12. The infrastructure bonds were a given tax-free status to encourage flow of funds to the infrastructure sector.

In Budget 2011-12, finance minister Pranab Mukherjee had allowed the National Highways Authority of India to raise Rs 10,000 crore, IRFC Rs 10,000 crore, Hudco Rs 5,000 crore and Power Finance Corporation Rs 5,000 crore through the tax-free bond issue route. Bonds worth an additional Rs 5,000 crore were allowed for the port sector, but with no dedicated finance company in the sector, this window remained unutilised.

Of the total Rs 30,000 crore to be raised through these agencies, Rs 25,000 crore would be raised during the year. The interest income on these bonds is tax free in the hands of investor, and there is no deduction of tax at source.