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 (Primary market) 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 / regular income.
The Govt of India have been issuing Savings Bonds since April, 2003. The last one being, 7.75% Govt Savings Bonds, which ceased for subscription on May 28, 2020.
The central Govt has now decided to replace 7.75% Bonds with new RBI Floating Rate Savings Bonds 2020 (Taxable) scheme. These bonds will be issued by the RBI and open for subscription very soon.
The  floating-rate bonds have variable interest rates that adjust periodically.
RBI Floating Rate Savings Bonds 2020
Below are the salient features of new Govt Savings Bonds;
| Maturity Period | 7 years (lock-in period) |
| Rate of Interest | 7.15% till 1-Jan-2021. Will be re-set every 6 months. |
| Benchmark for Reset | Prevailing NSC Rate + 0.35% |
| Risk Attached | Low Risk |
| Minimum Investment | Rs 1,000 |
| Maximum Investment | No Limit |
| Tax Treatment | Interest amount is taxable |
| Tax Benefit Available? | No |
- Who issues these Bonds?
- These Bonds are being issued by the RBI on behalf of the Govt of India.
- Who can buy RBI Savings Bonds?
- 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
- a Hindu Undivided Family.
- An individual, not being a Non-Resident Indian –
- Can NRIs invest in these RBI Bonds? – No
- 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.
- What are the Interest payment options?
- The bond will be issued in non-cumulative form only.
- The interest on the bonds is payable semi-annually on 1st Jan and 1st July every year.
- The coupon on 1st January 2021 shall be paid at 7.15%. As these are Floating rate bonds, the interest rate will be re-set periodically (six months). The prevailing NSC rate is 6.8%. So, the bonds will initially be issued with 7.15% rate (6.8%+0.35%).
- 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 on RBI Floating Rate Savings Bonds?
- 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 redemption shall be allowed for specified categories of senior citizens.
- The Bonds will be issued in Demat form only (Bond Ledger Account).
- 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.
Should you invest in RBI Floating Rate Savings Bonds 2020?
- If you are a senior citizen and looking for a periodic / secured income option (do note that interest income will not remain fixed), this is a decent choice. But, do note that Sr Citizen Savings Scheme currently offers better interest rate and you can also have a look at another option i.e, new Pradhan Mantri Vaya Vandana Yojana (PMVVY).
- If you are not a senior citizen but looking for a ‘secured income’ option with a time-frame of around 7 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% for a tenure of 5+ years.
- Kindly note that interest income on Savings Bonds is taxable (so post-tax yield can be low) and lack of liquidity can be a major draw-back.
- Post-tax returns = Pre-Tax returns * { (100-Tax Rate) / 100 }
Continue Reading:
- List of all Popular Investment Options in India – Features & Snapshot
- Lump sum Investment options for Retirees/Senior Citizens | Where to invest my Retiral benefits to get Regular Income?
- Best Tax Free Bonds to invest in 2020 | Factors to consider when investing in Bonds
(Post first published on : 27-June-2020)
REGARDING TDS DEDUCTIONS : WHETHER IS IT Rs10000 OR Rs 40000 PER FIN YEAR?
Dear Renganathan,
The TDS (tax deducted at source) threshold for bank and post office deposits has been raised from Rs 10,000 to Rs 40,000.
I believe for these bonds the threshold limit is still @ Rs 10k.
Dear Shree
very informative blog.
looking for solution…
A TDS of 10% is charged on dividend(wef 01 Apr 2020) in her case, when her total income is well below 2 Lakhs ( being senior citizen) and tax return is NOT required to be filed.
Defacto Dividend of Rs 5000/- per year limit amounts to 417/- per month . It implies that if a person is earning dividend of 60100/- per annum and is NOT eligible to file income tax return, but have to pay TDS @10%.
what could be the solution , to this?
Thanks
GSD
Dear Mr DHILLON,
Can file the ITR and get the refund (if any)..