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8% GOI Savings (Taxable) Bonds Make A Grand Comeback

UPDATE : This scheme is closed for subscription with effect from Jan 2, 2018, and replaced with the new 7.75% Savings (Taxable) Bonds. 

Interest rates on bank fixed deposits continue to tumble month after month. 

The good old Post Office Schemes too have suffered rate cuts in recent months. And more such reductions are not ruled out in the near future.

Even your EPF (Employee Provident Fund) may earn lower returns this year, and possibly in the coming year too.

However, amidst all this interest rate carnage, one investment still remains unaffected... the 8% Government of India Savings (Taxable) Bonds, 2003.

Once upon a time, these Govt. of India Bonds (also referred to as RBI Bonds) were a huge favourite. The primary reason for their immense popularity was of course the "tax-free" interest.

But things turned bad for the Govt. of India bonds when
a) the interest earned on the same was made taxable, and
b) due to the then prevailing economic scenario, bank fixed deposits offered higher interest rates than the GOI Bond.

As such, in the last few years, most investors lost interest in the GOI Bonds.

But the tide has now turned:

The interest rate of 8% on GOI Bonds is more than most bank fixed deposits. And, both are equally safe and secure. Hence, investors have again started looking quite favourably at these GOI Bonds.

There is no reason why the Govt. should continue to pay higher interest on these bonds. So, it is quite likely that Govt. will reduce the interest rates on the GOI Bonds sooner than later. Hence, those interested should move fast before the axe falls on GOI Bonds too.

All about the 8% Government of India Savings (Taxable) Bonds, 2003.

Listed below are the salient features of the 8% Government of India Savings (Taxable) Bonds, 2003.

Issuer: Reserve Bank of India

Eligible Investors: Individuals (single, joint or minor), HUFs, Charitable Trusts and Universities. NRIs are NOT permitted to invest in the GOI Bonds.

Face Value of the Bond: Rs.1000 (issued at par)

Limit on Investment: Minimum Rs.1000 or 1 bond. No limit on maximum investment.

Bond Tenure: 6 years (No interest is paid after the bond maturity)

Interest Rate: 8% per annum (compounded half-yearly or payable half-yearly)

Cumulative - For Rs.1000 bond value, you receive Rs.1601 at the end of 6 years
Non-cumulative - Interest for 6-months period ending in July and Jan, paid on Aug 1 and Feb 1

Taxation: Interest income is taxable as per the investor's income tax slab rate. TDS deducted if the interest exceeds Rs.10,000 in a financial year.

Where to Buy: Authorised branches of State Bank of India, Associate Banks, Nationalised Banks, a few private sector banks and Stock Holding Corporation of India Ltd.

Non-transferable: The Bonds are issued in the form of credit in the Bond Ledger Account and are NOT transferable

Non-traded: You cannot trade in these GOI bonds in the secondary market

Collateral: Eligible as a collateral for loans from banks, financial institutions or NBFCs

Nomination: Facility available to nominate person(s) entitled to receive the payment, in the event of the death of the bondholder

Premature Encashment: Restricted. Only for individuals of age 60 or more, after a minimum lock-in period of 3 years and up to 5 years

Partial Withdrawal: Not permitted

Only the investors in lower income tax brackets (and those who prefer to remain uninformed and illiterate) should consider investing in the 8% Government of India Savings (Taxable) Bonds, 2003.

For the smart and well-informed high taxpayers, debt mutual funds are definitely a much better alternative.

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