Close in the heels of the REC tax-free bond issue comes HUDCO’s tax-free bonds. Only this time, thanks partly to higher 10-year gilts (which act as a reference rate), the coupon rates of HUDCO are marginally higher than that of REC. For instance, the 10-year rate is at 8.39% (for retail investors with less than Rs 10 lakh investment) for HUDCO as against 8.26% offered by REC.
The 15-year bonds come with an interest rate of 8.76% per annum while the 20-year tenure will pay 8.74% a year. Investors can go with the 10 or 15-yer bond, based on their capital requirements. Interest is paid out annually.
What are tax-free bonds
Tax-free bonds are non-convertible debentures on which the interest income does not suffer tax throughout the tenure of the bond. There is no tax benefit (such as 80C) on the principal. Most debt options, barring the PPF and EPF suffer tax on the interest component. Your FDs, post office schemes and corporate deposits are no exceptions.
The coupon rate of the tax-free bond is actually the post-tax return for you. This makes this class of bonds attractive for most tax payers.
Added to this, government security yields saw a sharp rise after the recent hike in interest rate by RBI. As a result, long-term bond yields are high, providing scope for you to lock into them using these bonds.
The table below also illustrates how the bonds score over fixed deposits for those in the 20% and 30% tax bracket at this juncture.
However, given that the liquidity in these instruments may not be high and you should know about yield movements before you decide to sell, the bonds are best suited for retail investors as a hold-till-maturity option.
HUDCO is a public financial institution under the Companies Act and also registered as a housing finance company under NHB. It is a 100% government of India undertaking that seeks to provide long-term financing for social housing and urban infrastructure development projects.
The current issue of HUDCO has an AA+ rating from Care Ratings. That is one notch below the top rating but still considered low risk and investment worthy. REC’s bonds enjoyed higher rating.
HUDCO’s rating is slightly lower as a result of high exposure to sectors such as power and real estate, which are considered vulnerable in the current situation. Nevertheless, that it is a government company having healthy capitalization levels and access to low-cost funding provides comfort.
Hence, the slightly lower rating need not act a deterrent. The company had net profits of Rs 700 crore as of March 31, 2013, on total income of Rs 2923 crore.