HUDCO - Tax Free Bonds

Housing and Urban Development Corporation (HUDCO) is entering the debt capital market on 9^th January 2013,  with an issue of Tax Free Bonds of face value of Rs.1,000 each, in the nature of Secured Redeemable Non Convertible Debentures. Issue, closing on 22^nd January 2013, has a size of Rs.750 crore, with an option in company’s hand to retain an oversubscription upto the shelf limit of Rs.5,000 crore. Bonds, rated AA+ by CARE and IRRPL (formerly Fitch), indicating high degree of safety regarding timely servicing of financial obligations, are proposed to be listed on NSE.

Some features of this issue are:

1. The income by way of interest on these Bonds shall not form part of total income as per provisions under section 10 (15) (iv) (h) of Income Tax Act 1961.
2. There shall be no deduction of tax at source from the interest, which accrues to the bondholders in these bonds irrespective of the amount of the interest or the status of the investors.
3. As per provisions under section 2 (29A) of the Income Tax Act, read with section 2 (42A) of the Act, a listed Bond is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer. Under section 112 of the said Act, capital gains arising on the transfer of listed Bonds shall be taxed @ 10% without indexation.
4. Wealth Tax is not levied on investment in Bond under section 2(ea) of the Wealth Tax Act, 1957.

The current bonds are being offered under two series with features as under:-

*Retail investors can apply for a maximum of Rs. 10 lakh (limit hiked from Rs. 5 lakh earlier). 40% of issue reserved for retail investors.

Bonds are to be issued both in physical and dematerialized form, hence a demat account is not necessary to buy these bonds. Also, the bonds do not have any lock-in period.

Due to the step down feature of these bonds, a retail investor will get a lower interest rate if he purchases the bonds from the secondary market (post-listing) i.e. he will earn interest of 7.34% p.a. and 7.51% p.a. on Series 1 and Series 2 bonds respectively. Hence, the 50 basis point premium interest will be lost.  The current coupon rates are slightly higher than the recent AAA rated bond offering from PFC, which carried 7.19% and 7.36% p.a. rates for retail investors for 10 and 15 years respectively. 

HUDCO’s 15 year (Series 2) bonds are comparable to 11.59% pre-tax return earned on other fixed income instruments, assuming the highest tax bracket of 30.9% for retail individuals. Currently listed HUDCO bonds (issued in early 2012) are trading on BSE with yields of 7.32% - 7.40%, which is comparable to the 7.34-7.51% coupon rates being offered in the current issue. 

Thus, considering the tax free income to be earned from the bonds coupled with the likely falling interest regime scenario ahead, those looking for fixed asset allocation can subscribe to the series 2 bonds with tenure of 15 years.

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