HUDCO tax free bond-Should you subscribe?

The Housing and Urban Development Corporation Limited (HUDCO), a wholly owned enterprise of Government of India, is set to unveil its second tranche of tax-free bonds on December 2.

For the financial year 2013-2014, the Central Board of Direct Taxes (CBDT) allowed the entity to raise Rs. 5,000 crore through issuance of tax-free bonds. The company raised Rs. 190.80 crores on a private placement basis to institutional investors. And from its first tranche that kept open for subscription from September-October, the company raised Rs. 2,370 crore.

The base issue size of the second and final tranche of tax-free bonds is Rs. 500 crore with an option to retain oversubscription upto the residual shelf limit of Rs. 2,439.20 crore.

Should you subscribe to HUDCO's 2nd tranche of tax-free bonds?

The public issue of HUDCO tax free bonds launching on December 2, 2013 shall remain open for subscription until January 10, 2014. The minimum application size for the issue is Rs. 5000 i.e. 5 bonds issued at par.

The company offers a higher coupon rate for its 2nd tranche of tax-free bonds in comparison to its first tranche in the financial year 2013-2014. For retail investors investing a maximum of Rs.10 lac across all series of bonds, the company shall offer coupon rate @ 8.76%, 8.83% and 9.01% for maturity tenure of 10, 15 and 20 years respectively. So, investors falling in high income tax bracket can realize the coupon rate of 8.76% payable annually i.e. the highest across all issued tax-free bonds for a ten year term in this financial year.

Other category of investors including institutional investors shall be eligible for a lower coupon rate of 8.51%, 8.58% and 8.76% for 10, 15 and 20 years tenure respectively.

Also, being a Government of India company, the tax-free bonds of HUDCO are highly safe.

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