IRFC and HUDCO - Tax free bonds.

IRFC and HUDCO  - Tax free bonds.

Investors usually get confused over Tax free bonds and Long term Infrastructure bonds and assume that both are same. But one should note that they both are different in nature. In long term Infra bonds an additional amount of Rs 20,000 is allowed under Sec 80CCF as exemption from the existing Rs 1 lakh which is allowed under Sec 80C. However Interest received from these bonds are taxable. In case of Tax free bonds, principal amount is not exempted while Interest earned is exempted.

Earlier NHAI and PFC had received very good response from investors and now it’s time for Indian Railway Finance Corporation (IRFC) and Housing and Urban Development Corporation (HUDCO) to tap the market and raise funds by issuing Tax free bonds

IRFC, the financing arm of The Indian Railways, plans to raise funds aggregating up to Rs 6300 crore. The company plans to utilize the proceeds for acquiring rolling stock (passenger’s coaches, freight wagons, cranes etc) and for further enhancement of work in the Indian Railways. Minimum Application is of Rs 10,000 (i.e. 10 bonds) and then in multiple of Rs 5000 (i.e. 5 bonds). There are two options available for Retail Investors. The first one has a coupon rate of 8.15 per cent (for HNI and QIB is 8 per cent) with tenure of 10 years while the second option has a coupon rate of 8.30 per cent (for HNI and QIB is 8.10 per cent) with tenure of 15 years.

HUDCO as the name suggest that it is a company which does financing activities of Housing and Urban Infrastructure activities in India. HUDCO plans to raise up to Rs 4685 crore. The minimum Application is of Rs 10,000 (i.e. 10 bonds) and then in multiple of Rs 1000 (i.e. 1 bonds). The issue is almost similar to that of IRFC but here the Investors are getting marginally higher coupon rate for their Investment. Here also there are two options available for Retail Investors. The first one has a coupon rate of 8.22 per cent (for HNI and QIB is 8.10 per cent) with tenure of 10 years while the second option has a coupon rate of 8.35 per cent (for HNI and QIB is 8.20 per cent) with tenure of 15 years.

However in both the options, one should not forget that the additional Interest which is offered to Retail Investors will be there only if they are subscribed through Primary market. Bonds purchased through the exchanges will have the same coupon rate which is offered to HNI and QIB Investors. Both these bonds will be listed on both Bombay Stock Exchange (BSE) and National Stock Exchange (NSE)

We are of the opinion that, Indian economy is growing at a very rapid space and in the longer duration we may not see the same kind of higher Interest rates which are offered now. As the country grows Interest rates tend to reduce which is evident from the fact that developed economies have very low Interest rates. So for the long term investors it is a good opportunity. However, the bond is more attractive to investors who come under higher tax brackets. In case an Individual who comes under the highest tax bracket (30.9 per cent) then he gets a return anywhere around 12 per cent in either of the options and in either of the companies.

Even though these bonds will be traded in the market one should note that the volume in the exchanges may be quiet low. Hence the liquidity could be one of the problems. Also these bonds are treated as Long term Capital Assets if they are held for more than 12 months and also there will be no Tax deducted at Source on Interest earned. Hence one should invest in the bond if he has a long term horizon and does not require funds in the short run.

HUDCO is offering marginally higher coupon rate than IRFC, but has the rating of (AA+) one notch lower than that of IRFC (AAA) which is given by the rating agencies. We believe both the companies are Public Sector Company and have sound financials. Therefore one can Invest in either of the companies however would suggest to opt for 2nd Option where Investor would get better Yield.