7.75% Govt Savings Bond Scheme (RBI Bonds) : Features & Tax implications

The interest rates on Bank fixed deposits have been on the downward slope and the interest rates on popular small savings schemes are not very attractive either. Also, Tax Free Bond Issues are not available now. This is inducing many small investors to look out for better fixed income products which can give decent fixed rate of return.

For the last couple of years or so, the Savings Bonds (Taxable) have been one of the preferred investment options by many retirees, senior citizens and for those who are looking for fixed income.

The Govt of India have been issuing Savings Bonds since April, 2003. It has been estimated that around Rs 1,500 to Rs 2,000 crores are being invested in these Savings Bonds (which are popularly known as GoI Bonds / RBI Bonds) every month. The rate of Interest on these RBI Bonds has been fixed at 8%.

The central Govt has now decided to replace 8% Bonds with 7.75% Savings Bond Scheme with effective from 10th January, 2018.

7.75% Govt Savings Bond Scheme – Features

Below are the salient features of 7.75% Savings Bonds;

(Source : Ministry of Finance)

• Who issues these Bonds?
  • These Bonds are being issued by the Govt of India.
• Who can buy RBI Savings Bonds?
  1. An individual, not being a Non-Resident Indian –
     • (a) in his or her individual capacity, (or)
     • (b) in individual capacity on joint basis, (or)
     • (c) in individual capacity on anyone or survivor basis, (or)
     • (d) on behalf of a minor as father/mother/legal guardian
  2.  a Hindu Undivided Family.
  3. (a)’Charitable Institution’ to mean a Company registered under Section 25 of the Indian Companies Act 1956 (or)     (b) an institution which has obtained a Certificate of Registration as a charitable institution in accordance with a law in force; (or)  (c) any institution which has obtained a certificate from Income Tax Authority for the purposes of Section 80G of the Income Tax Act, 1961.
  4. ‘University’ means a university established or incorporated by a Central, State or Provincial Act, and includes an institution declared under section 3 of the University Grants Commission Act, 1956 (3 of 1956), to be a university for the purposes of that Act.

• Where / How to buy Govt of India Savings Bonds?
  • One can buy these bonds from State Bank of India, other nationalized banks and some private sector banks such as HDFC Bank and ICICI Bank . The bonds can be bought from the offices of Stock Holding Corporation of India as well.
• What are the Interest payment options?
  • The bond will be issued in cumulative and non-cumulative form, at the option of the investor.
  • The Bond will bear interest at the rate of 7.75% per annum.
  • Interest on non-cumulative bonds will be payable at half-yearly intervals from the date of issue. The interest on cumulative bonds will be compounded with half-yearly rests and will be payable on maturity along with the principal.
  • Interest to the holders opting for non-cumulative Bonds will be paid from date of issue up to 31st July/31st January, as the case may be and thereafter at half-yearly for period ending 31st July/31st January on 1st August and 1st February.
  • The Bonds shall be repayable on the expiry of 7 (Seven) years from the date of issue. No interest would accrue after the maturity of the Bond.
• What are the Tax implications?
  • The interest income is taxable as per your income tax slab rate.
  • There are no tax benefits available on the invested amount.
  • Tax deducted at source (TDS) will be applicable if interest from this instrument earned is more than Rs 10,000 in a financial year.
• Is pre-mature withdrawal possible?
  • Premature withdrawal facility is available to the eligible investors after lock in period of 4, 5 and 6 years in the age bracket of 80 years and above, between 70 to 80 years and 60 to 70 years respectively.
  • In case of joint holders or more than two holders of the Bond, the above lock in period will be applicable even if any one of the holders fulfills the above conditions of eligibility.
• The Bonds will be issued in Demat form only (Bond Ledger Account).
• The Nomination facility is available for Individual investment for sole holder or surviving holder basis. This facility is not be available for joint holdings and minor investment.
• The Bonds are not be transferable. Also, these are not tradeable in the secondary market.
• These bonds are not eligible as collateral for loans from banks, financial Institutions and Non Banking Financial Companies, (NBFC) etc.

Application form for 7.75% Govt Savings Bond Scheme 2018

Kindly click on the below image to download application form;

Should you invest in 7.75% Govt Savings Bonds?

• If you are a senior citizen and looking for a fixed income option, this is a decent choice. But, do note that Sr Citizen Savings Scheme currently offers 8.3% (Jan to March 2018) and you can also have a look at another option i.e, Pradhan Mantri Vaya Vandana Yojana (PMVVY) which offers RoI at 8%.
• If you are not a senior citizen but looking for a ‘guaranteed income’ option with a time-frame of around 5 years, you can consider saving some portion of your investible surplus in this Bond Scheme. Currently the bank FDs and time deposits offer interest rates of around 6 to 7% for a tenure of 6 years.
• If you can afford to take some risk and guaranteed return is not your investment objective, you may look at other options like Debt Funds, Hybrid Mutual Funds, Company Fixed Deposits, NCDs (if any) etc.,
• Kindly note that interest income on Savings Bonds is taxable (so post-tax yield will be very low) and lack of liquidity can be a major draw-back.
  • Post-tax returns = Pre-Tax returns * { (100-Tax Rate) / 100 }

Continue reading:

• Latest Interest Rates of Small Savings Schemes
• Best Investment options for Retirees / Senior Citizens
• List of all Popular Investment Options in India – Features & Snapshot

The above details are based on limited available information. If required, the above information will be edited/updated.

(Image courtesy of Stuart Miles at FreeDigitalPhotos.net)

(Post published on 02-January-2018)