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HUDCO tax free bonds: Should you subscribe?

HUDCO tax free bonds: Should you subscribe?
The assessment for the forthcoming Hudco Tax free Bonds which open on 9th January is simple, if you are in the 20% or 30% tax bracket subscribe without second thoughts - or else, simply ignore.

For retail investors, the coupon rate is 7.84% for 10 years and 8.01% for 15 years. Remember this income is tax free, which means the interest income would not be added to total income for the purpose of determining your tax liability.

Now, let's compare this with bank rates. Good PSU banks are offering interest rates of around 9% for on a five year fixed deposit. Even if you assume you are in the 20% tax bracket, the post tax yield works to just 7.2%, while in the case of those in the 30% tax bracket the returns from bank deposits post tax yield works to just 6.3%.

Therefore, you are far better off at 8% from HUDCO Tax Free Bonds which is tax free, then a bank deposit. The HUDCO Tax Free Bonds open for subscription on January 9.

This is perhaps the last of the tax free bonds that would offer such high yields. It's almost certain that interest rates are likely to fall and the forthcoming tax free bonds might not offer such high returns.

Also, you are locking in at higher interest rates for 15 years. If interest rates in the economy drop in the longer term, investors are likely to benefit. The bonds are to be listed on the exchanges, which means, you need not hold them until maturity and have the option to sell. However, one must note that these bonds are not very liquid which means you cannot sell or buy large quantities.

In any case, if you but the bonds from the exchanges, the coupon rate drops to 7.51 per cent per annum for 15 years and 7.34 per cent for 10 years.

Read more about: hudco tax free bonds
Story first published: Saturday, January 5, 2013, 9:57 [IST]
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