RBI Floating Rate Savings Bonds, 2021 – Features and Interest Rates
GOI has issued taxable bonds 7.75% during 2018-2020 and discontinued in May 2020. Ministry of Finance has announced now that they would be issuing Floating Rate Saving Bonds 2020 (Taxable) that would open for subscription from 1 July, 2020. While the current interest would be 7.15% per annum, such interest on these bonds would be reset every 6 months. One should assess its features and any negative factors before investing in such fixed income bonds. In this article, we would provide the features of RBI floating rate saving bonds 2021 (Taxable), current interest Rates 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 Floating Rate Savings Bonds 2028 that offered 7.75% interest rates. These are discontinued in May-2020. Ministry of finance has announced on 26 June, 2020 indicating that RBI would issue Floating Rate Savings Bonds, 2020 (taxable).
Features of Floating Rate Savings Bonds 2021
These floating rate bonds has opened for subscription from 1 July, 2020.
These bonds are in the denomination of Rs 100. One can invest as low as Rs 1,000 and in multiples of Rs 100 thereof.
Since these are issued by Govt of India, these are 100% safe.
Floating rate savings bonds current interest rate is 7.15%. Such interest would be reset every 6 months.
These bonds have 7 years tenure.
These bonds are available only non cumulative interest rate option. Interest would be paid every 6 months. Hence, you cannot invest money for accumulation.
Interest received through these bonds are taxable as per income tax act, 1961.
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 Floating Rate Savings Bonds?
There is only one option available which is a non cumulative option.
In this option the interest is paid every 6 months on 1 July and 1 January. If you have purchased these bonds between these periods, interest would be paid proportionately from the date of issue to these cut off date. Post that you would get interest every 6 months.
What are premature withdrawal rules of Floating Rate Savings Bonds?
Premature withdrawal T&C should be same as earlier GOI bonds. However, we are yet to get complete info. We would update this section if there is any change later.
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?
These bonds are issued in Rs 100 denomination. However, one need to invest a minimum of 10 bonds for Rs 1,000 and in multiples of Rs 100 thereon. There is no maximum limit of investment.
What are taxation rules of RBI Floating Rate Savings Bonds 2021?
Here are the taxation guidelines:
It offers only non cumulative interest payment option, interest would be paid every 6 months. TDS on floating rate 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.
Since there are no cumulative interest option and one would get their bond value only at maturity, wealth tax is not applicable.
Why to invest in Floating Rate Savings Bonds?
Here are some key reasons to invest in these bonds.
1) Investment in Floating Rate Savings Bonds 2020 is 100% safe and zero risk.
2) These saving bonds offer higher interest rates of 7.15% per annum currently, which are higher compared to any major bank FDs or post office FDs.
3) 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.
4) Conservative investors who are looking for safety of their capital and stable income every 6 months can invest in such bonds.
5) There is no maximum limit for investment. You can invest as much as you can.
Why NOT to invest in Floating Rate Savings Bonds?
Now let us check few limitations/negative factors too.
1) These interest rates are NOT locked for 7 years. The interest rate is reset every 6 months and can change.
2) 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.
3) 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. This section would be updated once we get complete info on premature withdrawals.
4) 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.
5) One cannot get loan on such bonds. Again liquidity before maturity is a major issue here.
6) Though these are issued for a 7 year tenure, one cannot claim any tax deductions u/s 80c which are generally available for any FD investment above 5 years.
7) Interest received half yearly is taxable in the hands of the investor based on their income tax slab.
Can Senior Citizens opt for this Floating Rate Savings Bonds?
While these bonds are good for senior citizens (7.15% current interest rates per annum and payable semi-annually), 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 Floating Rate Savings Bonds as another option.
How to invest in these Floating Rate Savings 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 floating rate 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 bond value would be credited to your bank account linked to your demat account.
Should you invest in RBI Floating Rate Savings Bonds, 2021?
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 7.15% per annum can invest in this scheme. They should also note that this interest rate would be reset every 6 months.
3) Conservator investors who want to invest in fixed income and their primary objective is the safety of their investment.
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Floating Rate Savings Bonds, 2021 (Taxable) Review
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