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RBI 7.15 % Floating rate Saving Bonds 2020. Pros and Cons of Investing in these Bonds.

RBI 7.15 % Floatingrate Saving Bonds 2020

 

The Government of India has announced on 26 June 2020 Floating Rate Savings bonds, 2020 (taxable) scheme Instead of 7.75 percent savings taxable bonds which were stopped issuing from May 28, 2020.

In this article, we will discuss the new features of Floating rate savings bonds, pros, and cons of investing in these bonds, how to invest in these bonds, premature withdrawal, and Taxation of these bonds.

What are Government Saving Bonds?

The Bonds are the debt instrument provided by the corporate or government to debt holders, creditors, and the issuer. The bonds help provide financial support in spending and create wealth over the duration.

GOI has been issuing the savings bonds from 2013. In May 2020 the popular 7.75 savings bonds were discontinued. These bonds are suitable for investors who are looking for the highest safety and regular income. 


Features of the Floating Rate Savings Bonds 2020

  • The Interest rate is 7.15 percent per annum.
  • The subscription of the floating rate bonds will be available from July 01, 2020.
  • The interest rates on these bonds will be revised every 6 months. The first reset will be from January 01, 2021.
  • Interest will be paid every six months. There is no option to pay interest on a cumulative basis.
  • The Minimum Investment is Rs 1000 and in multiples of Re 100 afterward.
  • There is no maximum limit of investing in these bonds.
  • They are a safe investment as it is issued by the Reserve Bank of India on behalf of the Government of India.
  • The tenure duration will be 7 years.
  • Premature withdrawals are only allowed for senior citizens based on terms and conditions. 

Factors to be considered before investing

  • Interest
  • Safety
  • Taxation
  • Duration
  • Liquidity

Floating Bonds Interest rates

The Interest rate is 7.15 % per annum.

The Interest rate is linked with the National Savings Scheme. The Floating bonds have a higher interest rate of 0.35 percent than NSC. Currently, the interest rate of NSC is 6.8 percent.

The interest will be paid every 6 months on 1st January and 1st July of each year and only Non-cumulative options.

You will not get a fixed interest rate throughout the bonds. The interest rate may change every six months. The first interest will be paid on January 01, 2021, with a 7.15 interest.



How to Invest In these Bonds and Eligibility?

 

The bonds may be eligible for the personal residence in India and a Hindu undivided family. NRI cannot invest in these bonds. Minors can also invest in these bonds through guardian and HUF.

It is issued in a Bond ledger account. The certificate of holding will be issued to investors. Bonds will be held in digital mode i.e. bond ledger account (BLA).

One can invest in various forms such as Cash up to Rs 20,000 only, drafts, cheques, and any electronic modes. You can visit SBI and other public sector banks, ICICI, HDFC, Axis, and IDBI banks to accept applications.

The interest payment is directly credited to the holder’s bank account. The Bonds can be repayable after the expiry, 7 years.

Related post -  Best Monthly Income Investment Schemes


Premature Withdrawal

Premature Withdrawal of these bonds can be categorized into three categories only for senior citizens.

  1. Between 60 to 70 years of age - have a lock-in period of 6 years
  2. Between 70 to 80 years of age - have a lock-in period of 5 years
  3. Above 80 years - have a lock-in period of 4 years.

Post the lock-in period as described above age limit they can withdraw the bonds

There is a premature withdrawal penalty of lower 50 percent interest that is revived for the last 6 months. For example, if the bond is withdrawal after 4 years from the date of issue then for 3.5 years the interest would be paid normal and for the last remaining 6 months 50 percent of the interest would be deducted from the amount to be received

The investor can nominate any person to receive the money of bonds in case of the death of single or joint holders. The Bonds cannot be transferred to a nominee in case of the death of the holder in the form of a bond ledger account.


Taxation of Floating bonds

These bonds are taxable according to the income tax act 1961. It will be according to your Income-tax slab.

TDS is applicable on all interest payments, if you want to avoid TDS you may need a certificate from the Income Tax Department.


Pros of Investing in Floating Savings Bonds


Before investing in these bonds you may need to know the advantages and disadvantages of such floating savings bonds.

  • Risk-free - as the scheme is backed by the Government of India it is a safe investment and risk-free. It has Zero credit risk and no risk default on interest payments.
  • Interest rates- as the saving bonds are offering 7.15 % interest rates annually which is higher than the bank Fixed Deposits.
  • Stable income- those who are looking for protecting their capital and generating income can invest in these types of bonds.
  • Limit- There is no maximum limit for investing in these bonds.

Cons of Investing in Floating Savings Bonds


You need to consider the cons before investing in floating bonds

  • Locked duration- the bonds are locked for 7 years and the main thing is the interest rates they are not fixed and will be reset every 6 months.
  • Premature withdrawal - only senior citizens have the option for premature withdrawal. Others can only redeem after 7 years.
  • No Liquidity - It is not traded in the secondary market and highly illiquid. It cannot be transferable.
  • Taxable - there are no tax benefits for investing in these bonds. No loan feature is availed against these bonds.
  • No Fixed returns - the interest rate reset every 6 months. If there is any financial crisis and economy downs then it may affect interest rates of these bonds.

Conclusion

The Floating savings bonds may be beneficial for Conservative investors as these bonds are safe and risk-free. It will be offering 7.15 interest rates which are higher than many bank FDs which are offering about 5 to 6 percent.

The major issue is about liquidity as it is locked for 7 years. Other alternatives investment for senior citizens is Senior Citizen Saving Scheme (SCSS) and Post Office Saving Scheme, Pradhan Mantri Vay Vandana Yojana (PMVVY).

It depends on investor objectives. It will be beneficial for senior citizens or retired citizens. It will be better to invest in these bonds and receive quarterly interest. You need to consider the rate of interest rates in the future depending upon the market conditions.


The Government of India Notification on Floating Rate Savings Bonds

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