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Tax free IRFC and HUDCO Bonds-Review

 

The market is flooded with a number of bond issues in recent times. Companies like L&T infra, REC, PTC, HUDCO (Housing and Urban Development Corporation), NHAI, IRFC (Indian Railway Finance Corporation) and IDFC have come up with various attractive investment offers. Some of the issues are based on tax-free offers whereas others are based on tax saving benefits. In any case, the investors would gain in post tax yields when compared to other debt investment instruments. After a slow down in inflation, the RBI has already declared pause in the interest rate hike. The investors are expecting a fall in an interest rate in near future; therefore, it has made bond market attractive for investment at the peak of interest based return.

The issue of HUDCO and IRFC bonds started from 27th Jan 2012 and ended on 10th Feb 2012. In these issues, the interest earned through investment are tax free oppose to the other issues which offered the tax saving benefit.

Let’s have a glance on the HUDCO and IRFC issue details:

 

HUDCO

IRFC

Nature

Tax free

Tax Free

Allotment Basis

First Come First

First Come First

Issue Size (Rs. Crore)

Up to 4685

Up to 6300

Maturity (in Years)

10 or 15

10 or 15

Credit Rating

AA+ by FITCH(Ind) & CARE

AAA by CRISIL, CARE & ICRA

Listing & Trading

NSE & BSE

NSE & BSE

Interest

8.22-8.35%

8.15-8.30%

Tax Benefit

Under 80CCF

Under 80CCF

Face Value(Rs.)

1,000

1,000

Minimum Investment

10,000

10,000

Though the credit rating of HUDCO is slightly lower than IRFC but still both issues are equally attractive and carry low risk for investment perspective. Since both the organization is owned by government of India so risk attached with it is very low.

Listing and Trading Details

Both the bonds were available in physical as well as the dematerialized format for investment. These bonds would be listed in NSE and BSE exchange after the allotment. Post listing, these bonds would be also traded through the exchange, and the allotted share can be sold directly through the stock exchange. When an initial investor would sell his bond through the exchange then the new buyer would be entitled to receive the interest coupon that is valid for other investors.

Post Issue Review

The recent overwhelming response seen during the listing of NHAI bond has increased the expectation from the listing of HUDCO and IRFC issues. The NHAI issue was listed at a premium of 3% and looking at the tax-free benefit of HUDCO and IRFC issue; it is very much expected to list at a much greater premium of around 5-6%. If prior to the listing, the CRR is further sliced down by the RBI, then the premium could be even higher than the expectation. The bond market works converse to the interest rate movement and the participation of a large number of HNI in these issues has increased the future expectation. The tax-free nature of both the issues would give it a good life in the future also, and a sustained volume is expected to be seen post listing. These types of issues are not very common in the market, and so it is even more attractive to the investors. In these investments, the amount invested would not be allowed as a deduction from the total income however the interest earned would be tax free. So, these are more attractive to the high net-worth investors. If the investor sells these bonds before 1 year then the tax would be levied on the short-term capital gain basis and if it is sold after one year, then long term capital gain tax would be applied.

Author

Amit Sethi is an MBA (Fin) graduate and a Financial Consultant. He has spent 8 years in Equity research and Stock broking sector. He can be reached at amvilube@gmail.com

Published Feb 27 2012

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