7.75% GOI Savings (Taxable) Bonds – Should you invest now?
7.75% GOI Savings (Taxable) Bonds review
Interest rates have been falling in the last few months. Investors who depend majorly on fixed income are worried these days. Here comes Government of India Savings (Taxable) Bonds. GOI Saving Bonds 2018 are still open now where one can invest and get 7.75% interest per annum. Since these are issued by Govt of India, your principal amount is 100% safe. We could see some of the investors rushing towards purchasing these government saving bonds now. One should assess its features and any negative factors before investing in such saving bonds. In this article, we would provide the Government of India Savings (Taxable) Bonds details now in 2020, Interest Rates, Yield and who should invest in such bonds.
What are Government Saving Bonds?
Government of India has been issuing the saving bonds from 2003. In 2018, they have reduced the interest rates and started issuing a new series as GOI Saving Bonds 2018 with 7.75% interest rates.
Features of GOI Savings (Taxable) Bonds
These bonds opened for subscription in 2018 and still available for subscription now in 2020.
One can invest as low as Rs 1,000 per bond.
Since these are issued by Govt of India, these are 100% safe and zero risk.
GOI Savings bonds offer interest rate of 7.75% per annum.
Govt saving bonds is for 7 years tenure.
These bonds are available in cumulative and non cumulative interest rate options.
Interest received through these bonds are taxable as per income tax act, 1961.
These are exempted from wealth tax, 1957.
Premature withdrawals allowed based on specific terms and conditions for Senior Citizens.
Who is eligible to invest in these bonds?
Any investor in an individual capacity or joint capacity and Hindu Undivided Family (HUF) can invest in these bonds. NRI’s cannot invest in these bonds.
What are Various options available in GOI Savings (Taxable) Bonds?
These are available in two options
1) Non cumulative option: In this option the interest is paid every 6 months on 31st July and 31st January dates. If you have purchased these bonds between these periods, interest would be paid proportionately from the date of issue with these cut off date. Post that you would get interest every 6 months.
2) Cumulative Option: In this option, the interest is compounded half yearly and paid on maturity along with the principal. If you have invested Rs 1,000 per bond, you would get Rs 1,703 on maturity after 7 years.
What are premature withdrawal rules of GOI Saving Bonds?
Senior Citizen investors can withdraw before 7 years based on below conditions.
1) 60-70 years of age – There is a lockin period of 6 years. Post that they can do premature withdrawal of these bonds.
2) 70-80 years of age – There is a lockin period of 5 years. Post that they can do premature withdrawal of these bonds.
3) 80+ years of age – There is a lockin period of 4 years. Post that they can do premature withdrawal of these bonds.
One would get 50% lower interest that is receivable in the last 6 months as a penalty for premature withdrawal. E.g. if premature withdrawal is done after 4 years from the date of issue of these bonds, for 3.5 years the interest would be paid normal and for last 6 months, 50% of the interest would be reduced from the eligible amount.
What are minimum and maximum to invest in these bonds?
One need to invest a minimum of Rs 1,000 per bond. There is no maximum limit of investment.
Can I take Loan on Government Savings Bonds?
Since the tenure of these bonds is 7 years, one would get doubt whether in case of emergency, can we take a loan from GOI against these bonds. The answer is NO. You cannot take loan on these bonds. Even you cannot keep them as collateral security with any bank to take loans.
What are taxation rules of GOI Saving Bonds?
Here are the taxation guidelines:
1) In case of non cumulative option, interest would be paid every 6 months. TDS on GOI Savings Bonds would be deducted before making payment of interest as per tax laws. However, one needs to add such interest to their total income and pay income tax based on their income tax slab.
2) In case of Cumulative option, interest is paid only on maturity along with the principal. Again necessary TDS on GOI Savings Bond would be deducted on interest which is paid on maturity. One needs to compute the interest based on their income tax slab and pay tax on such interest received from these bonds at that time.
3) These bonds are exempted from wealth tax, 1957.
What is the GOI Savings Yield?
Though these bonds have 7.75% interest rate per annum, the interest is compounded every 6 months. Let us check the effective interest rate and yield
1) For cumulative interest rate option the interest is paid every 6 months and 7.75% remains same.
2) For non cumulative interest rate option interest is accumulated and paid only after 7 years. The effective interest rate would be 7.9% (Every Rs 1,000 invested, first 6 months interest is Rs 38.75 and second 6 months interest is Rs 40.25 totalling to Rs 79).
3) The GOI savings yield for non cumulative option works out to be 10%. If you invest Rs 1,000 per bond, you would get Rs 1,703 as maturity amount i.e.Rs 703 is the total interest received for 7 years and effective yield is 703/7 = 10.04%
Why you should invest in GOI Savings Bonds?
Here are some key reasons to invest in these bonds.
1) Investment in GOI Saving bonds is 100% safe and zero risk.
2) These saving bonds offer higher interest rates of 7.75%, which are higher compared to any major bank FDs or post office FDs.
3) These interest rates are locked for longer tenure of 7 years. You don’t need to worry about a fall in interest rates in future.
4) Senior Citizens who have surplus money beyond their emergency needs and looking for higher interest rates can invest in such schemes. See my note in a separate section about this.
5) Conservative investors who are looking for safety of their capital and stable income can invest in such bonds.
6) There is no maximum limit of investment in these bonds. You can invest as much as you can.
Why you should NOT invest in GOI Savings Bonds?
Now let us check few limitations/negative factors too.
1) Investors other than senior citizens, cannot do premature withdrawal of these bonds. In case of emergency, these funds are not useful for them at all.
2) Senior Citizens too cannot do premature withdrawal except after 4-6 years of the tenure of the bonds that too is based on their age. Such restrictions make such schemes not that attractive.
3) Though these are issued in demat account, these are not traded on stock exchanges. One cannot use them for emergency withdrawal by selling on stock exchanges.
4) One cannot get loan on such bonds. Again liquidity before maturity is a major issue here.
5) Though these are issued for a 7 year tenure, one cannot claim any tax savings u/s 80c which are generally available for any FD investment above 5 years.
6) Interest received half yearly or on maturity is taxable in the hands of the investor based on their income tax slab.
Can Senior Citizens opt for this GOI Saving Bonds?
While these bonds are good for senior citizens (7.75% interest rates per annum and payable every half year), the major issue is about liquidity. The tenure of the bond is 7 years. If they need to withdraw they need to wait for a minimum of 4-6 years (depending on their age). My advice would be that, they should first opt for Senior Citizen Saving Scheme (SCSS). Beyond this they check Post Office Monthly Income Plan. If they have surplus money beyond their emergency need and after exhausting the maximum limits in above options, they can look for GOI Savings Bonds as another option.
Who can invest in these bonds?
If you are any of the below investor, you can invest in these bonds.
1) Senior Citizens indicated in the above section.
2) Conservator investors who are looking for fixed income of 7.75% per annum.
3) Conservator investors who want to invest in fixed income and their primary objective is the safety of their investment.
How to invest in these GOI Saving Bonds Online?
Once you have reviewed its pros and cons, you might think how to buy government bonds. These bonds are issued in demat form. You can approach your demat stock broker or approach any of the major banks (SBI, ICICI, HDFC etc.) for GOI bond application form to invest in them. Once you invest and bonds are issued to you, these are credited to your demat account. At maturity or based on premature withdrawal of these bonds, the maturity amount would be credited to your bank account linked to your demat account.
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