Why RBI Floating Rate Savings Bonds are suitable for some

Fixed income products have been gaining traction of late. Interest rates on National Savings Certificate (NSC), along with other instruments, were hiked from January 2023. Therefore RBI Floating Rate Savings Bonds, whose rate is linked to NSC, can also be considered for investment .

 RBI Floating Rate Savings Bonds 2020 allow investors to put their savings into an instrument that is low risk and offers reasonably higher interest rates. This scheme was launched in July 2020 by Government of India. Resident Indian or HUF (Hindu undivided family), charitable organisations and universities can invest in this scheme. These bonds can be opted for individually or jointly with another individual and can also be purchased by a parent/guardian on behalf of a minor.

Floating rate bonds are issued in electronic format i.e., in the Bond Ledger Account, which is opened by the receiving office for the individual(s). The bonds are issued at a face value of ₹1,000, which is minimum investment amount, and thereafter in multiples of ₹1,000. There is no ceiling on the maximum amount of investment that can be made. The maturity of these floating rate savings bond is seven years.

Return profile

Issued by the government, the RBI Floating Rate Savings Bonds are considered risk-free. The interest rate applicable is the rate offered to National Savings Certificate plus 35 basis points. The interest is paid semi-annually i.e., on January 1 and July 1. The rates on NSC are revised every quarter, therefore on the day of interest payment the prevailing rate of interest of NSC plus 35 basis points will be paid out. The interest rate on NSC currently is 7 per cent, so the interest on floating rate bonds is 7.35 per cent.

How to invest

Those wanting to invest in these bonds may visit nationalised banks or private sector ones, Investors must fill out the application form and submit KYC documents such as PAN and address proof as per the bank guidelines. There is also an option to apply online via bank website. Investments till ₹20,000 can be in cash or else as cheque, draft, or any other electronic mode.

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Taxation

These bonds are taxable i.e., the interest received on these bonds is taxable under Income Tax Act 1961, and TDS is also applicable. If the investor is eligible for exemption under I-T Act, then such exemption must be informed at the time of application. The interest received here will be taxed at slab in the head “Income from other sources”.

These bonds can neither be sold in the secondary markets nor transferred to any other person. Transfer is only allowed to the nominee or the legal heir in case of death of the bond holder. These bonds cannot be pledged as collateral for obtaining loan against them like other securities, e.g., shares, insurance products, mutual funds, etc.

The lock-in period for these bonds is seven years with no premature withdrawal facility. However, certain classes of investors are given relief. Investors in the age group of 60-70 years will have lock-in period of six years, those in 70-80 years bracket will have five years as lock-in while investors 80 years or above have a lock-in of four years.

Who should go for it

These bonds are a good investment option for senior citizens who depend on regular streams of cashflow. Therefore, senior citizens can invest in these bonds for regular income after they have exhausted limits in FD accounts. However, since these deposits are not liquid and have long lock-in period, the decision must be made keeping this fact in mind. Regular investors can also check out this option and can park surplus funds if it suits their financial goals.

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