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Govt.'s New RBI Savings (Taxable) Bonds At Floating Rate

Recently, with effect from May 29, 2020, the Govt of India has stopped taking fresh subscriptions under its hugely popular 7.75% Savings (Taxable) Bonds, 2018 scheme.

And, in its place, it has introduced the new Floating Rate Savings Bonds, 2020 (Taxable). This new scheme is open for subscription with effect from July 1, 2020.

This is on the expected lines:
Over the past few months, RBI has brought down the policy rates quite sharply.
Interest rates on bank fixed deposits have been tumbling month after month.
The good old Post Office Small Savings Schemes too have suffered massive rate cuts.
Due to higher interest rate volatility in recent times, promising a fixed rate of interest for long term is no longer a viable proposition.

Hence, there was no reason why the Govt. should continue to pay a 'higher and fixed rate' of 7.75% on its Savings Bonds. So, the axe has fallen on the 7.75% Savings Bonds scheme; and the new Bonds introduced with floating rate of interest.

Listed below are the salient features of the new Floating Rate Savings Bonds, 2020 (Taxable).

Scheme Name: Floating Rate Savings Bonds, 2020 (Taxable)

Issuer: Reserve Bank India on behalf of the Govt. of India

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

Issue price: Rs.100/- (issued at par)

Minimum Subscription: Rs.1000/- (nominal value) and in multiples thereof.

Maximum Limit: There's no maximum limit for investment in these Floating Rate Bonds.

Bond Tenor: 7 years from the date of issue.

Interest: Floating and payable on half-yearly basis on 1st Jan and 1st July every year. (There is no option of cumulative interest.)

Base Rate: The interest rate will be linked to the prevailing National Saving Certificate (NSC) rate with a spread of (+) 35 bps over the respective NSC rate.

Interest payable as on Jan 1, 2021 has been fixed at 7.15%.

Interest Reset: Every six months and applicable for the next half-year.

The first reset will happen on Jan 1, 2021.

Image by Gino Crescoli from Pixabay

Taxation: Interest on the Bonds will be taxable according to the relevant tax status of the bondholder. TDS too shall be deducted, if applicable.

Modes of payment: Cheques, Drafts or any Electronic mode (in favour of the receiving bank and payable at the place where the application is submitted). Or Cash (max up to Rs.20,000 only)

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

Form of holding: Only in the electronic form as credit to the 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 and specified private sector banks (i.e. ICICI Bank, HDFC Bank, IDBI Bank and Axis Bank), either directly or through their agents.

Non-transferable: Floating Rate Savings Bonds, 2020 (Taxable) are NOT transferable [except transfer to a nominee(s)/legal heir in case of death of the bondholder]

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 etc.

Nomination: Facility available to nominate one or more persons [except minors] entitled to receive the payment, in the event of the death of the bondholder.

Premature Encashment: Restricted. (i) Only for individuals of age 60 and above AND (ii) 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. Jan 1 and Jul 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.

Brokerage/Commission: Brokerage at the rate of 0.5% of the amount mobilized will be paid to the Receiving Offices and they shall share at least 50% of the brokerage so received with brokers/sub-brokers registered with them.

Only the investors in lower income tax brackets may consider investing in the Floating Rate Savings Bonds, 2020 (Taxable).

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

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