HUDCO Tax Free Bonds can be bought by tax paying individuals in the highest tax bracket. These Bonds are listed on the NSE and BSE and makes sense for those in the highest tax bracket.

Let's assume you are in the highest income tax paying slab, which means 30 per cent bracket and your income is more than Rs 10,00,000.

Now, if your salary income is Rs 10,00,000 and you have interest income of Rs 2,00,000 from bank deposits, you have to pay tax on Rs 12 lakhs.

Now, let's assume that instead of investing in the bank deposit, you have invested in the HUDCO Tax Free Bonds, some of which attract an interest rate of 8.2 per cent, 8.1 per cent and so on. Now on these bonds you get an interest, which is tax free. This means that your bank deposit interest income is added to your salary income and your tax liability is increased.

But, the interest on the HUDCO Bonds is tax free and you do not have to pay tax.

Where can you buy the HUDCO Tax Free bonds?

These Bonds of various tenures were issued last year and the previous year. They can be purchased from the National Stock Exchange. The N2 series pays an interest rate of 8.2 per cent annually, while the NI series pays an interest rate of 8.1 per cent annually, and the N4 series pays just 7.34 per cent.
It's best to consider the N2 and N3 Series HUDCO Bonds because their interest rates are attractive. The N2 series is traded at around Rs 1155. Now, if you purchase the same at current rates, your yield would fall. You have to look at purchasing them at attractive prices, so as to ensure your yield remains high.

The Bonds are not very attractive for those in the 10 and 20 per cent tax bracket, since they can get interest income and pay tax on them and still come out with better yields then the tax free bonds. Hence, it makes sense for those in the highest tax bracket to buy these bonds, in place of other taxable interest earning securities.

The bonds are for a duration of 10, 15 and 20 years, though you may have to hold it for a lesser period as they were issued a few years back. In case you do not want to hold the bonds until maturity, you can sell the same on the NSE.

Remember, that tax free bonds have poor liquidity and if you buy in large quantities you may not be able to sell all at the same time.

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