RBI Floating Rate savings Bonds 2020 – Should you invest ?

Post discontinuation of the RBI fixed interest bonds yielding 7.75% p.a on 28th May 2020, RBI has come out with  Floating Rate Savings Bonds, 2020 (Taxable) scheme commencing from July 01, 2020. The scheme allows Resident Indians/HUF to invest in a taxable bond, without any monetary ceiling.

 

The face value of the bond is Rs. 1000/- with a tenure of 7 years.

 

Interest Rate

 

The Bonds have been linked with the Interest rates applicable to the National Savings Certificate (NSC) from time to time. The Interest Rate of the bonds will be 35 bps (0.35%) more than the Interest rate of the NSC. Currently the NSC Interest rate is 6.80% p.a. therefore the Bonds Interest has been fixed as 7.15% p.a. for six months.

 

The Interest Rate will be reset every six months. For the first six months it has been fixed at 7.15%. The Interest will be paid half yearly on 1st January and 1st July every year. Cumulative option is not available for the bonds

 

Premature Redemption

 

The Option for premature redemption is only allowed to senior citizens after minimum lock in period as below:

 

Age Bracket                     Lock in Period
60 to 70 Years          6 Years from the date of issue
70 to 80 Years          5 Years from the date of issue
80 Years & above     4 Years from the date of issue

 

In case of joint holders or more than two holders of Bonds, any one of the holders shall fulfil the above conditions of eligibility.

 

Mode of Allotment

 

The Bonds will be issued only in the electronic form and held at the credit of the holder in an account called Bond Ledger Account (BLA), opened with the Receiving Office. No allotment in Demat Mode.

 

A certificate of holding will be issued to the holder/s of Bonds as a proof of subscription.

 

Taxation and TDS

 

The Interest received on Bonds is taxable and TDS of 10% will be deducted on the same.

 

The bonds are not transferable and won’t be listed on the exchanges. The bonds also cannot be pledged as collateral for loans from Banks, Financial Institutions and NBFCs.

 

Should you Invest ?

The Bonds are issued by the Government of India so there is No Credit Risk, but at the same time the rate of Interest is not assured for the complete tenure.

 

Secondly the bond lacks liquidity and the option for monthly interest preferred by retirees.

 

Senior Citizens have an option for investing in Pradhan Mantri Vay Vandan Yojna – PMVVY which has an assured return on 7.4% for 10 years – There is an investment cap of Rs. 15 lakh per individual.

 

Senior citizen Post office Saving scheme -SCSS also has an assured return of 7.4% for 5 years with an investment cap of Rs. 15 lakh per individual.

 

Since 2011, interest for  Small saving schemes like PPF, NSC, KVP etc, have been linked to government security yields and are reviewed every quarter. The interest rates of the small schemes are currently below the Interest rate offered by RBI floating rate bonds. Therefore a senior citizen who has already invested in PMVVY and SCSS should invest in the RBI Floating Rate Bonds.

 

For young investors, one can go for Annuity plans where a right variant can lock the interest rate for life long.

 

Nevertheless it’s a good option for a risk-averse investor.

 

 

For more details on Small saving schemes visit here

Pradhan mantri Vay Vandan Yojna link