HUDCO is coming out with tax free bonds on Jan 28, which offers the best interest rate on tax free bonds, so far in FY 2015-16.

Consider this: SBI and ICICI Bank and most other bank deposits offer a maximum on fixed deposits at 7.50-7.75%. Now, the interest earned on these bank deposits is taxable, pushing your yield very much lower.

How Hudco Tax Free Bonds 2016 Are Better Than Bank Deposits Or Small Saving Deposits

If you are paying taxes, there is no question, that HUDCO Tax Free Bonds offer much better returns than bank deposits. Now, let us do a quick comparison on the post tax yields from the tax free bonds.

Now, as can be seen from the above table, the post tax yield is almost 11 per cent for those in the highest tax bracket. So, if you are paying heavy taxes, there is no question that you should subscribe to these bonds.

The disadvantages of the HUDCO Tax Free Bonds 2016

There are some disadvantages of these bonds. One is that with a solid coupon rate, they tend to get subscribed on the very first day. What this means is that chances of bulk allotments are almost negligible. Most of the high networth individuals and even celebrities tend to subscribe to them. This can be a major disappointment for small and retail investors. Another disadvantage of these tax free bonds is that there is not much liquidity.

So, when you want to say sell 50,000 bonds, you might not find huge number of buyers, on the exchanges where these bonds are listed.This makes them pretty illiquid, when you want to raise large amounts of money through sale.

Other details of the HUDCO Tax Free Bonds

1) The institution will raise around Rs 1711 crores through this offering.

2) The Bonds will open for subscription on Jan 27.

3) HUDCO will close the offer on Feb 10. We believe that the issue would be oversubscribed on the first day itself. So, do not wait till Feb 10.

4) The top rating agencies have a rating of AAA on the bond, which means a high level of safety on timely payment of interest and principal amount.

Who should subscribe to the HUDCO Tax Free Bonds?

Those in the highest tax bracket, should subscribe to this offer. As can be seen in the table above, the bonds offer an excellent post tax yield of as much as 11.05 per cent on a post tax basis. This makes it a good bet. Also, it is important to remember that if interest rates in the economy fall, you are hedging against any risk, by locking money in high yielding tax free bonds. We would recommend to subscribe to the 15 year bonds, that offer a coupon rate of 7.64 per cent.

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