Can you afford to ignore the Hudco tax free bonds?

There is a flood of tax-free bonds in the market of late. After Rural Electrification Corp and Power Finance Corp’s tax-free bond issues in December, Indian Infrastructure Finance Co (IIFCL)came out with onelast month. The latest addition to the list is Housing and Urban Development Corp (Hudco). This issue will remain open from 9 January-22 January. The issue seeks to raise Rs 750 crore with an option to retain up to Rs 5,000 crore.

Features

A tax-free bond with a face value of Rs 1,000. It is a secure, redeemable, non-convertible debenture. You get two options that is trench-1 series-1 bonds with a tenor of 10 years and trench-1 series-2 bonds with a tenor of 15 years. The frequency of interest payment is annual while the minimum application size is of five bonds. While the coupon rate for trench 1 series 1 bond is in the range of 7.34 percent to 7.84 percent while trench 1 series 2 bond the rate is in the range of 7.51 percent to 8.01 percent. As a retail investor, you will get an extra 50 basis points (bps). It does not come with a put and call option. The trading lot is of 1 bond and as much as 40 percent of the issue is reserved for retail investor.

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[caption id=“attachment_582152” align=“alignleft” width=“380”]  You can apply for trench 1 bond in either physical or dematerialised form. Moneycontrol.com[/caption]

Rating

CARE has assigned “CARE AA+” while IRRPL has assigned “IND AA+” to these bonds. HUDCO is a government company and this rating states low credit risk.

Finer details

You can apply for trench 1 bond in either physical or dematerialised form. The bond is to be listed on the National Stock Exchange (NSE). There is a ceiling on coupon rates based on the reference government securities (G-Sec) rates. Interest earned from the bond does not form a part of total income, and hence it is a tax-free bond.

However, when you sell the bond on the exchange, you will have to pay capital gain tax. Sell the bond after 12 months, the capital gain will be calculated as per 10 percent without indexation. One important thing to keep in mind is that if you are not the original allottee of the bond and get transferred/ bought it later in the secondary market, you will get a coupon rate lowered by 50 bps than the applicable coupon rate for the retail investor.

What should you do?

Compared with IIFCL bonds, for which the subscription is open until 11 January, Hudco bonds offer better coupon rate. The coupon rates for IIFCL bonds is in the range of 7.69 percent, 7.89 percent and 7.90 percent. However, the rating for IIFCL bonds is one notch better than these bonds, which is CARE AAA, which is stable to bonds.

The annual interest with these bonds is better than the post-tax returns you would have earned on fixed deposits, which is 6.2-6.6 percent. That’s what you earn in a one year FD, in today’s market. Keep in mind, that the Hudco bonds are available in two tenors of 10 and 15 years and hence comes with a long-term lock in period. Of course, you will be able to trade these bonds on the NSE. But, getting a buyer for the bonds may turn out to be difficult as it depends on the market conditions then. However, if, as rumoured, the government discontinues tax-free bonds in the coming Budget, the prices of such bonds may go up.

To invest in these bonds or not is your call. But, before investing, do look into your long-term fixed income allocation. Once you have exhausted your PPF and EPF, you could look into investing in these bonds. With the Reserve Bank of India widely expected to cut interest rates this month-end, there is a clear indication that the rates may come down soon. This could be a good time to lock in at a higher rate for a long period.