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Should you invest in HUDCO Tax-Free Bonds?

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Housing and Urban Development Corporation Limited (HUDCO)is coming out with a Tax-free bonds issue. The issue opens on January 27, 2016 and closes on Feb 10, 2016. The issue size is Rs 500 crores.

HUDCO has an option to retain oversubscription up to Rs 1,211.5 crores. Therefore, the total issue size can be as high as Rs 1,711.5 crores. HUDCO had been allowed to raise Rs 5,000 crores through tax-free bonds this fiscal. It has already raised Rs 1,288.5 crores through private placement.

Before HUDCO, many other public sector entities including NTPC, IREDA, PFC , REC , IRFC  and NHAI have already come out with tax-free bonds issue this financial year.

In this post, I shall focus only on the factual information about HUDCO tax-free bonds. Other details and investment rationale has been covered many times in previous posts of tax-free bonds.

HUDCO Tax-Free Bonds Issue: Salient Features

invest in HUDCO Tax-free bonds

HUDCO Tax-Free Bonds Interest Rate

HUDCO Tax-free Bonds interest rate

Points to Note about HUDCO Tax-Free Bonds

  1. The bonds are available in maturities of 10 and 15 years only.
  2. Only the interest earned is exempt from income tax under Section 10(15)(iv)(h) of the Income Tax Act.
  3. No tax exemption under Section 80C of the Income Tax Act on the investment amount.
  4. Retail investors can only invest up to Rs 10 lacs (no more than 1000 bonds) in these bonds.
  5. If you purchase more than 1000 bonds, you will be classified as High Net worth Individual and will be eligible for a lower interest rate. In fact, if you hold more than 1000 bonds at the interest record date, you will be considered HNI and get a lower interest rate (7.39% instead of 7.64% for 15 year bond).
  6. Interest shall be paid annually.
  7. NRIs cannot invest in HUDCO tax-free bonds.
  8. HUF can invest in HUDCO tax-free bonds.
  9. These bonds will be listed on BSE. However, you can expect liquidity to be low. Hence, exit in the secondary market won’t be as easy.
  10. If you sell these bonds within 1 year, capital gains will be taxed as per your income tax slab.
  11. If you sell these bonds after 1 year, capital gains will be taxed at 10%. There is no benefit of indexation for these bonds. For more on taxation of tax-free bonds, refer to this post.
  12. HUDCO is promoted by the Government of India. So, you need not worry about credit risk.

Must Read: All you need to know about Tax-Free Bonds

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Should you invest in HUDCO Tax-free Bonds?

These bonds are long tenor bonds and exit from these bonds won’t be easy. The interest is exempt from tax.

The interest rate on offer is lower than that offered in earlier tax-free bond issues by other public sector entities.

The tenor is 10 and 15 years. Investors looking to invest for such long horizon may find better options in equity mutual funds.

Since there is regular interest payout, you don’t get benefit of compounding in these bonds. So, these bonds are not suited for long term wealth creation. Hence, if you do not seek regular income, then these bonds are not for you.

Investors in the 10% tax bracket do not have much to gain by investing in these bonds. You can create FDs for 7.5-8% easily without any lock-in period. If you consider 50 basis points of interest more important than locking your money for 10-20 years, then you can go for these bonds. Personally, I wouldn’t apply if I were in 10% tax-bracket.

Those in 20% or 30% tax brackets and seeking regular income can think about investing in these tax-free bonds.

Exit in the secondary market may not be as easy or at an unfavorable price. So, be prepared to hold the bonds till maturity if you are planning to invest.  In any case, if you are looking for a favorable exit in the secondary market, you are betting on interest rates, which are never easy to predict. And yes, don’t forget about capital gains taxes.

Do consider the following before making the final decision.

Retirees and Senior Citizens can get 9.3% p.a. in senior citizen savings scheme (SCSS). Even though the interest on SCSS is taxable, you get tax benefit on the investment amount under Section 80C of the Income Tax Act. Thus, the effective yield is much higher, especially if you are taking full tax benefits.

There is no tax benefit on investment amount under Section 80C HUDO tax-free bonds.

The same argument can also be extended to 5-year tax saving fixed deposits.

For instance, if you invest in a 5-year tax saving FD that offers 8% per annum, the post-tax yield  (effective yield) shall be 9.89% (10% tax bracket), 12.08% (20% tax bracket) and 14.68% (30% tax bracket).This is under the assumption you get full tax benefit for investment in such FD under Section 80C. Though tax-free bonds and tax-saving FDs are not strictly comparable, I hope you get the idea.

It should not happen that you leave your Section 80C limit unutilized while you are investing in tax-free bonds.

What do you plan to do?

1 thought on “Should you invest in HUDCO Tax-Free Bonds?”

  1. Very good and informative article for a newbie like me… Thank you for sharing your personal input and advice too… Cheers ~

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