Fintotal News Analysis | Housing and Urban Development Corporation Ltd (HUDCO) Tax Free bonds - January 2013. What is it all about?
Housing and Urban Development Corporation Ltd (HUDCO) Tax Free bonds - January 2013. What is it all about?
Ruby Jacob, 03 Jan 2013

HUDCO is offering tax-free bonds for subscription and the issue will be open for 09 January 2013 to 22 January 2013.

Why is HUDCO issuing bonds?

HUDCO is a housing finance company. It provides long term finance for constructing houses and undertakes urban development programmes. Some of its funds are raised from the market in the form of bonds. HUDCO will raise about Rs 750 crores in tranche 1 of these series.

Are HUDCO bonds safe?

Yes, we are quite comfortable with the rating it has got from the rating agencies. HUDCO is a wholly owned company of the government of India.

What are the returns in HUDCO bonds?

Coupon rate of HUDCO tax free bonds 2013

10 years bonds- 7.84%

15 years bonds- 8.01%

Most likely this issue of HUDCO's tax free bonds would be the highest coupon tax free bonds in this financial year. Forthcoming issues after RBI's monetary policy review on 29 January are expected to have lower coupon rates.

If your application is less than Rs 10 lacs you come under retail category. The minimum application amount is Rs 5000 and the face value of each bond is Rs 1000.

Can NRIs apply for these bonds?

Yes, NRIs can apply for these bonds on repatriation or non-repatriation basis.

How to apply for HUDCO Bonds?

Application of HUDCO bonds can be made in both physical and demat form. Application can also be made in ASBA or non-ASBA mode.

Applications must be made only in the prescribed Application Form. You can download the forms or apply online through SBI Capital Markets, Karvy Computershare, Enam Securities Pvt, ICICI Securities or Kotak Mahindra Capital.

What is tax free in HUDCO bonds?

Here is where you need to pay good attention. Firstly it has nothing to do with tax rebate of Sec 80 CCF. Section 80 CCF (Rs 20,000) has been scrapped this year and you will not get any tax rebate on infrastructure bonds like the one you got last year. Hence please do not fall for this trap.

Now, what is tax free? Income is taxable. Similarly interest is treated as income and is taxable. For example one earns interest from his fixed deposits with banks and he needs to pay tax on it. But in the case of these bonds the interest you earn is tax free. The investment itself does not qualify for any rebate only the coupon interest is tax free. But in case you sell the bonds before maturity you need to pay capital gains tax. So you pretty much need to hold till maturity if you really wish to get tax free returns. Also once the bonds are sold by the original buyer they will earn 0.5% lower coupon rate.

Is there any lock in HUDCO bonds?

No, though the only way to exit is by way of selling it in the secondary market. These bonds are to be listed on NSE. But this does not make the bonds any liquid. Tax free bonds are not freely traded on the exchanges. Less volume of traded bonds mean you might not get good value for selling them. And even if you manage to, you'd have to pay capital gains tax.

Is it good to invest in HUDCO bonds?

For retail investors, our take: avoid investing in HUDCO bonds. The coupon rate of 8.01% may not beat inflation rate in the long term.  You will not be able to use the power of compounding as well. In fact debt mutual funds can do a better job for you.

For retirees and senior citizens this is a reasonably decent option. Since interest is tax free in these bonds, comparing with Senior Citizens Savings Scheme offering 9.3% taxable interest, the effective yield of 15 year HUDCO bonds works out to 10% if you are in the 20% tax slab and 11.6% if you are in the 30% tax slab. However we reinstate that even for this category of investors, nothing would work better than debt mutual funds which in turn invest in a number of good quality debt instruments including bonds.

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