HUDCO Tax free Bonds: Should you subscribe?

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HUDCO Tax free Bonds: Should you subscribe?
HUDCO Tax Free Bonds are perhaps the best of the tax free bonds that have been offered so far, simply because their coupon rates are extremely attractive for those in the high tax bracket.

For retail investors applying for bonds up to Rs. 10 lakh, the coupon rate shall be 8.39 per cent per annum for 10 years, 8.76 per cent for 15 years and 8.74 per cent for 20 years.

Now, these rates are higher then the recent rates offered by REC for its tax free bonds. Let's assume that an individual is in the 10% tax bracket and he subscribes for the 15 year bonds, which offer a coupon rate of 8.76%. His yield will work to 9.63% pre-tax. This is even better then bank fixed deposits. Similarly, if one is in the 20 year tax bracket the pre-tax yield will work out to 10.51% and for those in the 20% tax bracket 11.33%.

These are excellent returns for tax paying individuals. For those who do not reach the threshold tax paying limit of Rs 2 lakhs, you may well want to avoid the bonds.

Other details

The bonds are extremely secure as HUDCO is a government entity. The issue is open for subscription from today (Sept 17) and would close on Oct 14. Institutions and high networth individuals would be entitled to lower interest rates of 0.25%, then those mentioned above.

HUDCO plans to raise up to Rs 4,809 crore through public issue of tax-free bonds. The issue size of the offering is Rs 750 crore with an option to retain up to Rs 4,809 crore.

The Ministry of Finance has permitted HUDCO to raise Rs 5000 crore through bonds during FY14, of which Rs 190.8 crore has been raised last month through private placement to institutional investors.

Read more about: hudco, tax free bonds, rec
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