HUDCO tax free bonds open; should you subscribe?

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HUDCO tax free bonds open; should you subscribe?
Government owned Housing and Urban Development Corporation (HUDCO) tax-free bonds opens for subscription today, with the institution planning to raise up to Rs 2,805 crore through the second tranche.

It may be recalled the company in its first tranche earlier in January had raised Rs 2,195 crore. The second tranche will open today and close on March 15, 2013.

HUDCO would utilise the issue proceeds for lending purposes, working capital requirements, augmenting resource base of the company and other operational requirements.

Should you invest?

The company is offering a coupon rate or interest rate of 7.69 per cent for 15 years maturity period and 7.53 per cent for 10 years to retail investors. An investment up to Rs 10 lakh qualifies under retail category. For others, the coupon rates are 7.19 per cent for 15 years and 7.03 per cent for 10 years.

It's important to note that interest income from these bonds are tax free. This means that interest income earned is not added to total income to computer tax.

Now, if you look at the retail investor interest offered for the Bond, then you would realise that subscription to the bonds only if you are in the 30 per cent tax bracket, as your yield will almost be near 10 per cent. In case you are in the 10 and 20 per cent tax bracket its best to avoid the issue. The one thing that is worth mentioning is that if interest rates in the economy fall, you would stand to gain as you have locked-up at higher rates for a longer duration. However, if you have invested large sums, then its not easy to get out because of the poor liquidity for these bonds on the exchanges.

HUDCO, a mini-ratna firm, is a financial institution that provides long-term finance for housing and urban infrastructure projects.

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