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Tata Capital > Blog > Wealth Services > Floating Rate Savings Bonds – Who Should Invest?

Wealth Services

Floating Rate Savings Bonds – Who Should Invest?

Floating Rate Savings Bonds – Who Should Invest?

The RBI introduced the Floating Rate Savings Bond (taxable) with interest rate of 7.15% on 1 Jul 2020. The interest rate bonds are reset every six months on 1 July and 1 January of each year.  However since its launch the same has been unchanged. What is a floating rate savings bond and who should invest in it? This article will help you understand this investment instrument in detail.

What is a floating rate savings bond (taxable)?

A floating rate savings bond (taxable) is a debt instrument issued by the government of India. It is a floating rate instrument which means the interest rate or the coupon rate is not fixed and will fluctuate from time to time. There is a benchmark rate according to which the interest rate will change as per RBI’s supervision. The minimum investment can be Rs. 1000 in this instrument without any maximum limit. It pays interest on a half-yearly basis. It was launched in the year 2020, on July 1st.

This is a risk-free investment option as it is a government bond thus, there is almost 0% risk involved. The maturity of these bonds is of seven years. However, there is a special provision for senior citizens where they can redeem the bond before the maturity date.

What are the eligibility criteria for investing in a floating rate savings bond?

The eligibility criteria for investing in these bonds are as follows as per RBI guidelines –

  • The investor can be a resident of India
    • In his or her capacity
    • Or on a joint capacity basis
    • Or based on the either-or survivor
    • Or on behalf of a minor as a father/ mother/ legal guardian
  • A Hindu Undivided Family (HUF).

Features of Floating rate saving bond (taxable), 2020

  • The interest rate of these bonds is subjected to change every six months as per the benchmark rate. If the benchmark rate remains the same, then the interest rate may remain the same. However, every six months, RBI has to announce the interest rate for the next six months. For instance, RBI announced the coupon rate for July 2021 to December 2021 recently.
  • The benchmark rate is the interest rate of the National savings certificate. The rate of interest of NSC at present is 6.8%. Thus, the rate of interest on Floating rate savings bond is 6.8%+.35% = 7.15%. It hasn’t changed as the interest rate for NSC hasn’t changed for July and September quarters.
  • The lock-in period is seven years. The senior citizens can redeem it as per special provision after 6 years and super senior citizens can redeem it after 5 years.
  • These are taxable bonds. The interest you earn on these bonds is taxable. The interest amount will be added to your taxable income and will be taxed as per the tax slab you fall into.
  • These bonds are transferable to the nominee but cannot be traded. Upon the death of the bondholder, the bond will be transferred to the nominee automatically.
  • Also, it can be used as collateral for taking loans.

Additional Read: How RBI Bonds Score over Fixed Deposits?

Who should invest in Floating rate saving bond (taxable), 2020?

Basically, the people who fall in the lower tax bracket may invest in these bonds. The reason being a taxable feature of the bond. So, if you fall under a higher tax bracket, the tax payable would increase further because of the interest-earning. Moreover, the interest earning from the bond will reduce because of the tax. For instance, if you fall under the 30% tax bracket, the 7.15% interest rate would be 4.5% for you.

At the same time investors who have retired and who want a regular source of income to sustain their lifestyle are also the ideal investor for this.

Advantages of Floating rate saving bond (taxable), 2020

The advantage of investing in these bonds includes –

  • There is no credit risk involved as these are government bonds which are 100% risk-free debt instruments. You do not have to worry about default on the payment of interest or the principal on maturity.
  • The interest on floating rate savings bonds is higher than normal recurring deposits and time deposits. While the current interest offered by State Bank of India to the general public on 5-year time deposit is 5.4%.

Additional Read: Money Lessons from the second COVID wave

Conclusion

So, people looking for risk-free investment options can invest in floating-rate saving bonds. These bonds are paying quite a higher coupon which changes every six months based on the NSC’s interest rate. If you are falling under a lower tax bracket or you have retired, then these can be a great investment option for you. Do visit Tata Capital Wealth Site, which will provide you expert guidance and more information on the investment options available and will be helpful to achieve the investment objectives.

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