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7.75% Savings (Taxable) Bonds 2018 Make A Debut

UPDATE: This scheme has been closed for subscription with effect from May 29, 2020, and replaced with the new Floating Rate Savings Bonds, 2020 (Taxable).

Earlier this week, the Govt of India had announced the closure of its hugely popular 8% Savings (Taxable) Bonds, 2003 scheme with effect from Jan 2, 2018.

And now, in its place, the Govt. has introduced the new 7.75% Savings (Taxable) Bonds, 2018 scheme. This new scheme will be open for subscription with effect from Jan 10, 2018.

This was expected for many months now:

Interest rates on bank fixed deposits have been tumbling month after month.

The good old Post Office Small Savings Schemes too have suffered rate cuts, quarter after quarter.

Hence, there was no reason why the Govt. should continue to pay the higher interest of 8% on its Savings Bonds. So, a bit late in the day, the axe has fallen on the 8% Savings Bonds scheme; and the new Bonds introduced with lower rate of interest.

Listed below are the salient features of the new 7.75% Savings (Taxable) Bonds, 2018 scheme.

Issuer: Govt. of India

Eligible Investors: Individuals (single, joint or minor) and HUFs. NRIs are NOT permitted to invest in these Bonds.

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

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

Bond Tenure: 7 years (This is one year more than the 6 years in case of 8% Savings Bonds)

Interest Rate: 7.75% per annum (compounded half-yearly or payable half-yearly)

Cumulative Bonds: For Rs.1000 bond value, you receive Rs.1703 at the end of 7 years

Non-cumulative Bonds: Interest for 6-months period ending in July and Jan, to be credited to your account on Aug 1 and Feb 1

New Savings Bonds take shape in this season of falling interest rates.

Taxation: Interest income taxable as per the marginal income tax slab rate of the investor. TDS applicable if the interest income exceeds Rs.10,000 in a financial year.

Mode of payment: Cash / Drafts / Cheques or any Electronic mode (in favour of the receiving bank and payable at the place where the application is tendered)

Date of Issue: Bonds to be issued on the date of receipt of cash, or on the date of realization of draft / cheque.

Form of holding: In the demat form and credited to Bond Ledger Account of the investor. Certificate of Holding to be issued to the bondholder.

Where to Buy: State Bank of India, Various Nationalised Banks, three private sector banks (viz. ICICI, HDFC and Axis Bank) and Stock Holding Corporation of India Ltd.

Non-transferable: 7.75% Savings (Taxable) Bonds are NOT transferable

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

Not a Collateral: Not eligible as a collateral for loans from banks, financial institutions or NBFCs

Nomination: Facility available to nominate person(s) [except minors] 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 AND after the specified minimum lock-in period.

Lock-in period: 4 years (for investors of age 80 years and above) / 5 years (for investors of age 70 to 80 years) / 6 years (for investors of age 60 to 70 years)

Date of premature withdrawal: Only on the interest payments dates i.e. Feb 1 and Aug 1, AFTER the completion of minimum lock-in period.

Penalty for premature encashment: 50% of the interest for the last six months of the holding period

Post-maturity interest: No interest is payable after the bonds mature

Commission: Registered brokers will be paid brokerage at the rate 0.5% of the subscription amount.

Only the investors in lower income tax brackets (and those who prefer to remain uninformed and financially illiterate) should consider investing in the 7.75% Savings (Taxable) Bonds, 2018.

For the smart and well-informed high taxpayers, debt mutual funds are definitely a much better alternative to earn (almost) risk-free and (almost) tax-free income — and completely liquid with no lock-in  and no TDS  and partial withdrawal allowed  and (after a nominal period) no penalty on any withdrawal any time.

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