HUDCO Tax Free Bonds: Tax free interest rates at a new record

Business

oi-Sunil

By Sunil Fernandes

Published: Tuesday, December 3, 2013, 8:49 [IST]

For the very first time a tax free bond is offering an interest rate that is above 9 per cent. The Housing and Urban Development Corporation Ltd (HUDCO) has come out with its Tranche II Tax free Bond offering, whose interest rate for retail investors is at a new record as yields on G-SEC have spiked and interest rates are linked to the G-SEC yields.

For retail investors, the annualised coupon or interest rate offered by the HUDCO Tax Free Bonds is 8.76 per cent, 8.83 per cent and 9.01 per cent for tenure of 10, 15 and 20 years, respectively.

Those in the highest tax bracket get a superb pre-tax yield of of 12.68 per cent, 12.77 per cent and 13.03 percent for 10, 15 and 20 years.

Now, the best rate of interest one can get from a good public or private sector bank on a fixed deposit is 9-9.5 per cent, pre-tax yield.

Even if you are in the 20 and 30 per cent tax bracket, your post tax yields would be much better if you subscribe to the HUDCO Tax Free Bonds.

The only drawback with these bonds are interest is paid after one full year and there is otherwise no regular income. Also, there is no cumulative option for investors.

Ratings

CARE and IRRPL have accorded a AA+ rating for the bond issue, which is just a notch below the highest AAA rating. The rating signifies a low credit risk.

It's important to remember that HUDCO is a government owned company and to that extent the risk of default is minimal.

In any case HUDCO has reported strong set of results in the past with very low levels of non performing assets.

All in all, the HUDCO bonds look attractive from an investor perspective, particularly for those paying taxes. In fact, if you are in the highest tax bracket and have huge interest income, it would be prudent to put some money into the HUDCO Bonds.

The Bonds are currently open for subscription and sill close on Jan 10.

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