HUDCO Tax Free Bonds (Jan-Feb 2016 Issue) : Details & Review

For the last few months, state-run companies like IREDA (Indian Renewable Energy Development Agency), NHAI (National Highways Authority of India), NTPC (National Thermal Power Corp), PFC (Power Finance Corporation), REC (Rural Electrification Corp) and IRFC (Indian Railways Finance Corp) have come up with Tax Free Bond issues. All these issues have been oversubscribed. HUDCO Tax Free Bonds is the latest issue which is going to be open for subscription from 27th January, 2016 to 10th Feb 2016.

Several state-run companies raised Rs 30,000 crore through tax-free bonds in FY12, Rs 25,000 crore in FY13 and Rs 50,000 crore in FY14. These funds are utilized to fund infrastructure projects.

Below are the details of the firms and the maximum allocated amount of funds they can raise by offering new Tax Free Bonds in the current Financial Year (2016).

HUDCO Company Profile:

• Housing & Urban Development Corporation (HUDCO) is a Mini-Ratna company and it is a Government of India undertaking.
• It is classified as a Public Financial Institution u/s 4 A of the Companies Act, 1956 and as per Section 2(72) of the Companies Act, 2013.
• It was established on April 25, 1970 as a wholly owned government company with the objective to provide long term finance and undertake housing and urban infrastructure development programmes.

HUDCO Tax Free Bonds – March 2016 Public Issue Details

Below are the features and key highlights of HUDCO’s Tax Free Bonds public issue;

• Bonds Issue opens on : 2nd March, 2016.
• Issue closes on : 10th March, 2016.
• Issue size including over-subscription: Rs 1,788.50 crore (max).
• Basis of Allotment : For Retail Individual Investor – 40% of the Issue Size.
• Face Value : Rs 1,000 per bond.
• What is the minimum application size? : 5 bonds (Rs 5,000) per individual and in the multiple of 1 bond (Rs 1,000) thereafter.
• What is the maximum application size? : The maximum amount that an individual can apply is Rs 10 Lakh (Retail Category).
• HUDCO Tax free bonds are proposed to be listed on BSE (Bombay Stock Exchange) 
• Credit Rating of HUDCO Bonds : ‘CARE AAA’ from CARE and ‘IND AAA’ from IRRPL (The bonds with such ratings are considered to have high degree of safety regarding timely servicing of financial obligations and carry very low credit risk.)
• Allotment is done based on ‘first come first serve’ basis.
• Can NRIs apply for HUDCO Tax free bonds? – Persons Resident Outside India, Foreign nationals (including Non-resident Indians, Foreign Institutional Investors and Qualified Foreign Investors) and other foreign entities are not eligible to invest in this issue. (NRIs were allowed to invest in PFC, REC & IRFC issues)
• These instruments are classified as Tax free, secured, redeemable and non-convertible bonds in the nature of debentures.
• HUDCO Tax-Free Bonds will be issued either in Physical or Demat mode.
• Bonds can be held in physical or in dematerialized form, at the option of bondholders but the trading of the Bonds shall be in dematerialized form only.

Interest Rates offered on HUDCO Tax Free Bonds 2016

Below are the interest (coupon) rates that are offered for retail investors. Retail Option is for individuals whose application is for Rs 10 lakh or less ; (20 year bonds are not being offered)

• On 10 year duration bonds the Coupon rate is 7.29%.  (HUDCO’s last issue offered coupon rate of 7.27%)
• On 15 year duration bonds the Coupon rate offered is 7.69%.  (HUDCO’s last Jan issue offered coupon rate of 7.64%)
• 20 year duration bonds are not being offered in this issue.

(Investors who apply for bonds worth above Rs 10 Lakh & would get 7.04% on 10 year bond & 7.39% on 15 year bonds.)

HUDCO Tax Free Bonds – Jan/Feb 2016 Issue Details (Previous Public Issue)

Below are the features and key highlights of HUDCO’s Tax Free Bonds public issue;

• Bonds Issue opens on : 27th Jan, 2016.
• Issue closes on : 10th February, 2016.
• Issue size including over-subscription: Rs 1,211.50 crore (max). The size of the issue is small when compared to NHAI’s last issue of Rs 10,000 crore.
• Basis of Allotment : For Retail Individual Investor – 40% of the Issue Size.
• Face Value : Rs 1,000 per bond.
• What is the minimum application size? : 5 bonds (Rs 5,000) per individual and in the multiple of 1 bond (Rs 1,000) thereafter.
• What is the maximum application size? : The maximum amount that an individual can apply is Rs 10 Lakh (Retail Category).
• HUDCO Tax free bonds are proposed to be listed on BSE (Bombay Stock Exchange) 
• Credit Rating of HUDCO Bonds : ‘CARE AAA’ from CARE and ‘IND AAA’ from IRRPL (The bonds with such ratings are considered to have high degree of safety regarding timely servicing of financial obligations and carry very low credit risk.)
• Allotment is done based on ‘first come first serve’ basis.
• Can NRIs apply for HUDCO Tax free bonds? – Persons Resident Outside India, Foreign nationals (including Non-resident Indians, Foreign Institutional Investors and Qualified Foreign Investors) and other foreign entities are not eligible to invest in this issue. (NRIs were allowed to invest in PFC, REC & IRFC issues)
• These instruments are classified as Tax free, secured, redeemable and non-convertible bonds in the nature of debentures.
• HUDCO Tax-Free Bonds will be issued either in Physical or Demat mode.
• Bonds can be held in physical or in dematerialized form, at the option of bondholders but the trading of the Bonds shall be in dematerialized form only.

Interest Rates offered on HUDCO Tax Free Bonds 2016

Below are the interest (coupon) rates that are offered for retail investors. Retail Option is for individuals whose application is for Rs 10 lakh or less ; (20 year bonds are not being offered)

• On 10 year duration bonds the Coupon rate is 7.27%.  (IREDA’s latest Jan issue offered coupon rate of 7.53%)
• On 15 year duration bonds the Coupon rate offered is 7.64%.  (IREDA’s latest Jan issue offered coupon rate of 7.74%)
• 20 year duration bonds are not being offered in this issue.

(Investors who apply for bonds worth above Rs 10 Lakh & would get 0.25% less interest rate when compared to the above rates.)

Tax Saving Vs Tax-Free

So, how is tax-saving different from tax-free?

Though the two terms are used in relation to taxation matters, there exists a considerable difference between the two. Tax-saving implies that there are certain provisions in the Indian Income Tax Act that allows an individual to save tax by investment in some particular investment instruments (like ELSS mutual funds or Life insurance premium etc., under Section 80c) or when the taxpayer has incurred some expenses on which tax liability can be minimized to some extent (Example – HRA, LTA etc.,).

Tax-free on the other hand implies income that is not taxable in the hands of investors i.e. the income from such tax-free source is not included in the total income for the purpose of computation of total tax liability. With no income tax being charged on the returns on the tax-free investment no other rebate in the form of tax deduction for the amount invested is provided. So, Tax free bonds are not eligible for deduction under section 80c.

Should you subscribe to HUDCO Tax Free Bonds Jan 2016 Public Issue?

• It is advisable to follow the principle –Think beyond taxes when investing. Do not invest in Tax-Free bonds just because the interest income is tax free. Your investment should match your financial goals requirements.
• If you have time on your side (young or have long-term goals), equity oriented investment avenues (shares, mutual funds etc.,) are the best bets to realize your financial goals.
• If you are in 10% or 20% income slab rate, it may be prudent to ignore TFBs. The interest earned on bank FDs and other types of bonds are not exempted from income tax. It is added to your income and is taxed as per the income-tax slabs. As interest earned from tax-free bonds is not taxed, investors in higher tax brackets mostly earn a better post-tax return than from FDs. But remember, the bank FDs score over tax-free bonds in terms of liquidity as these bonds have longer maturity tenure.
• I believe that ‘lack of liquidity’ is the biggest disadvantage of Tax-Free Bonds. The debt mutual funds can generate higher returns when compared to Tax free bonds and you may redeem them anytime. So, the trade off is between higher returns by MFs and the post-tax benefits of tax-free bonds. (You may like reading – ‘Best Debt Funds to invest in India for 2016‘)
• Invest in this issue only if your income tax slab rate is at 30% and you want a steady source of income periodically over a long-term. Also, consider investing only a small portion of your savings towards these bonds.

Do you think one should invest in Tax free bonds? Have you invested in any of the TFB 2015-16 Public Issues?

Kindly share your views and comments on HUDCO Tax Free Bonds March 2016 issue.