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Tax Free Bonds Public Issues to conclude shortly

If you have some long-term money available, and are looking for a risk-free option, invest it now in the HUDCO tax free bonds.

As mentioned in my last week's post 'IREDA's Tax Free Bonds Public Issue opens this Friday', we are coming to an end of the "tax free bonds season" for FY 2015-16.

The next season may not begin before Oct-Nov 2016.

Most of the approved companies have completed their tax-free bonds quota for the financial year 2015-16. Only the NHAI's 2nd tranche and HUDCO issues are pending... to be concluded by March.

Indians love safe, assured and tax-free returns. Hence, all these public issues have been oversubscribed many times over.

There is no reason to believe that, the forthcoming public issue by HUDCO, won't repeat the stupendous success of the earlier issues.

HUDCO's Public Issue of 1st Tranche of Tax Free Bonds FY 2015-16

HUDCO (Housing and Urban Development Corporation Ltd.), a Govt. of India enterprise, has announced the public issue of the 1st tranche of its Tax Free Secured Redeemable Non-Convertible Bonds, for the financial year 2015-16. 

Details of the same are as under:

Bond Tenure : 10 years and 15 years
Face value : Rs.1,000 per bond
Minimum subscription : Rs.5,000 (5 bonds of Rs.1,000 each)
Issue period : Jan 27 to Feb 10, 2016 (with an option for early closure or extension)

Rate of interest
Retail Investors : 10-yr bonds - 7.27%. 15-yr bonds - 7.64%.
Other Investors : 10-yr bonds - 7.02%. 15-yr bonds - 7.39%.
Interest payment : Payable annually

As anticipated, this issue offers marginally lower rates than the recent IREDA / NHAI issues.

Retail Investors : Individuals and HUFs investing up to Rs.10 lakhs.
High Net Worth Individuals : Individuals and HUFs investing more than Rs.10 lakhs.
(Note: NRIs are not eligible to apply for these bonds.)

Should you invest in the HUDCO's Public Issue of Tax Free Bonds?

Issue size : Total size (including oversubsciption) = Rs.1,711.50 crores.
Allotment : 40% of the issue size is reserved for retail investors, which would be allotted on 'First Come First Serve' basis

Rating : 'CARE AAA' from CARE and 'IND AAA (Outlook:Stable)' from IRRPL 
[These ratings indicate the highest degree of safety regarding timely servicing of the debt and lowest credit risk.]

Liquidity : To be listed on BSE only
Loan : Borrowing permitted by pledging these bonds
Put / Call : No put or call option
Form : Both in Physical and Dematerialized form
Nomination : Allowed

Permanent Account Number (PAN) : Mandatory

1. Liquidity: Since trading in bonds is normally not very active, one cannot expect too much liquidity when listed. Therefore, if you can afford to lock-in your money for 10 to 15 years, such bonds are a good choice to earn tax-free income.

2. Taxation: The tax-free aspect is for the interest income only. Therefore,
a) investment in these bonds does NOT qualify for deduction u/s 80C; and 
b) if you sell before maturity, the capital gains will be taxable.

Short-term capital gains (holding period up to 12 months) will be added to your income and taxed as per your slab rate. Long term capital gains (holding period more than 12 months) will be taxed @10%. These bonds are NOT eligible for indexation benefit.

Interest rates on tax-free bonds are fixed, based on the G-Sec (Govt. Securities) interest rates prevailing around the time of the public issue.

Despite the policy interest rate cut of 0.5% announced by RBI in Sept, there hasn't been any significant drop in the market interest rates. Therefore, the interest rates offered on various tax free bonds issued this year, have more or less been in the same range.

This was reflected in the fact that, the recent issue of tax free bonds from NHAI, had slightly higher interest rates of 7.39% and 7.60% as compared to earlier issues from NTPC / PFC (7.36% and 7.53%), IRFC (7.32% and 7.53%) and REC (7.14% and 7.34%). 

Of course, IREDA offered the best rates (7.53% and 7.74%) as it is a AA-rated company, all others being AAA rated. (As per rules, AA-rated companies can offer 0.10% higher rates than AAA-rated issues.)

The rate reduction by RBI was quite significant. Hence, no further moderation in interest rates is expected in the next few months. As such, the future issues of tax free bonds would most probably be offered at around the same rates as the recent issues. However, if the banks drop their base rates or the Govt reduces the interest rate on Small Saving Schemes, then the G-Sec rates would also drop. 

This could result in lower interest rates on future issues of tax free bonds.

From the point of view of interest rates, this could more or less be the peak rate.

However, from liquidity angle, Tranche 2 of NHAI would somewhat be a better option. It would be larger in size than the HUDCO issue. Still, at nearly Rs.2000 crores, it may offer some liquidity, should you need to redeem your investment prematurely.

Ideally, if you can  "invest and forget", you may consider investing in HUDCO tax free bonds. Or else, you can wait for the NHAI's 2nd Tranche (but maybe compromise slightly on the interest rates.)

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