HUDCO tax-free bonds: Build up your returns

Five series of the bonds, with YTM of 6.1-6.5%, are actively traded on both BSE and NSE

Conservative investors including retirees looking for capital safety can consider buying the tax-free bonds issued by the Housing and Urban Development Corporation (HUDCO) that are available in the secondary markets, the BSE and the NSE.

As permitted by the Centre, HUDCO issued tax-free bonds in FY 2012, FY 2013, FY 2014 and FY 2016. In all, the company has issued 32 series of tax-free bonds with varying maturities of 10, 15 and 20 years. All these tax-free bonds are listed on the NSE and the BSE, of which many series are actively traded with relatively higher yield to maturity and liquidity.

According to data compiled by HDFC Securities’ retail research, five series of HUDCO tax-free bonds, with YTM of 6.1-6.5 per cent, are actively traded on both the exchanges. For instance, the HUDCO N2 series (ISIN INE031A07840), with a coupon rate of 8.2 per cent and residual maturity of 8.3 years, trades with a YTM of 6.44 per cent on the NSE.

Rating agencies India Ratings, CARE and ICRA have reaffirmed the highest rating of ‘AAA’ for HUDCO tax-free bonds. These bonds are available with a residual maturity of 3.3-15.2 years. Investors can buy the bonds that match their investment horizon.

Score over FDs, G-Secs

Since the interest paid by tax-free bonds are exempt from income tax, the current yield of 6.4 per cent translates to 9.1 per cent of pre-tax yield for investors in the 30 per cent bracket. This makes it a more viable option than bank fixed deposits for retail investors. Currently, public and private sector banks offer 6-8 per cent pre-tax interest rate for five-year FDs.

Tax-free bonds also score over government securities (G-Secs) as the interest income from G-Secs are taxed as per the investors’ tax slab. For instance, in the recent G-Sec auction held on November 22, the RBI set the cut-off yields at 7.76 per cent for the current 10-year benchmark securities, ‘7.17% GS 2028’. The post-tax yields under this investment work out to 5.4 per cent for an investor in the 30 per cent tax bracket.

It is worth noting that tax-free bonds enjoy almost equivalent sovereign guarantee compared with G-Secs.

About HUDCO

HUDCO is a wholly government-owned company with more than 46 years’ experience in providing loans for housing and urban infrastructure projects in India. It has been conferred the status of Miniratna (Category-I Public Sector Enterprise) by the Centre. Since its inception until FY18, HUDCO has funded about 18 million dwelling units, about 86 per cent of which belong to the economically weaker sections. The support extended by the Centre is in the form of allowing access to low-cost funds, extending guarantees, easing various norms, and guiding its broad policies and contours.

HUDCO’s gross non-performing loans stood at 6.3 per cent in FY18. The net NPA of the company stood at 1.09 per cent in the first quarter of 2018-19. However, State governments’ guarantee for the majority of HUDCO’s loan book, along with allocations in State Budgets have helped HUDCO keep a control over its non-performing assets.

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