Opportunity Gate-crashes!..: Housing and Urban Development Corporation Tax Free Bond

Thursday, February 2, 2012

Housing and Urban Development Corporation Tax Free Bond

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Housing and Urban Development Corporation Limited ( HUDCO ) has come out with a Rs 10,000 Crore tax free bond issue

HUDCO Tax Free Bond Issue Details

HUDCO is offering 8.22% for the 10 year series and 8.35% for the 15 year series.

There is a difference in rating as well and HUDCO is rated Fitch AA+ by Fitch and CARE AA+ by CARE which is a notch lower than the Indian Railway Finance Corporation Tax Free Bond Issue.

The minimum investment needed is Rs 10,000 and you can invest in multiples of Rs 1,000 after that. The bonds will list on both NSE and BSE and the bond issue size is Rs. 4,684.72 crores.

Option	Series I	Series II
Face Value	Rs. 1,000	Rs. 1,000
Minimum Investment	Rs. 10,000	Rs. 10,000
Tenor	10 years	15 years
Interest Rate: Retail Investors	8.22%	8.35%
Interest Rate: Other Investors	8.10%	8.20%
Interest Payment	Annual	Annual

This issue also has what's being called the step down feature which means that the higher interest rate that the retail investors get is only applicable as long as they hold the bonds. If they sell the bonds on the stock exchange then the person who buys it from them will not get the higher rate but will instead get the rate decided for the other categories.

Can NRIs invest in the HUDCO tax free bonds?

Yes, NRIs can also apply to this offer and can either buy it in the retail category or the other category.

Who falls under the retail category?

Individuals and NRIs who are going to invest less than Rs. 5 lakhs will fall under the retail category.

How will the shares be allotted?

First come first serve

What is tax free - Is the principal tax free or the interest tax free?

This is not like the 80CCF infrastructure bonds that are open right now so don't confuse these bonds with them. This is truly tax free in the sense that the interest you receive from these bonds will not be taxed.

The infrastructure bonds are called tax saving bonds but are not tax free. They save tax because when you invest in them then you can reduce the amount of investment (up to a maximum of Rs. 20,000) from your income and lower your tax incidence. But the interest income on them is taxable, so they are not tax free.

As far as the principal being tax free is concerned – the principal is always tax free. That's your money anyway and tax is charged only on the income by the way of interest or capital gains.

Brief Introduction of the company

The housing and urban development sector plays a significant role in the economic and social development of a country. The access to and the quality of housing and urban basic services directly influence the quality of life of people, their productivity levels and growth potential.

Before the establishment of HUDCO, the Government of India was operating a number of subsidized housing schemes and loan schemes. The subsidized housing schemes were meant for industrial workers, economically weaker section of the society and slum dwellers, while the loan schemes were targeted for the people in the low-income and middle-income groups as well as rental housing schemes for State Government employees. All these schemes were under the direct control of the Ministry of Works and Housing. Such a system of housing finance did not give the required thrust for promoting housing development activities, which in many cases were considered of lower priority.

Issue Closing date - 10 Feb 2012

The bonds will be listed on the BSE.

HUDCO Tax Free Bonds and Bank Fixed Deposits

HUDCO bonds score well for those in the highest tax bracket. So if you invest Rs 1 lakh in HUDCO bonds, and are in the highest tax bracket, you will get an interest income of Rs 8,300 per annum for 15 years which is tax free. As against this, even if you earn a 9% interest on a bank fixed deposit and you are in the highest tax bracket (30.9%) you will earn an interest of Rs 9,000 per annum but will pay a tax of Rs 2,781, so the net interest you earn is only Rs 6,219, which is a yield of 6.22%

IRFC Tax Free Bonds and PPF

Tax-free interest of 8.3% is the highest available after PPF, and there is no upper ceiling on investment. Though PPF offers you an interest of 8.6%, it is subject to revision and the maximum amount you can invest is only Rs 1 lakh per annum.

Caution

Even though the bonds will be listed, one is not sure if there will be an active secondary market for these bonds. Hence, if you need the money in between, you may have no other way out.

How to Apply for HUDCO Tax Free Bonds ?

Download HUDCO Tax Free Bonds below and fill up, attach all the required documents and submit it to any of the collection centre below:

Collection canter near you

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