Government of India has announced launch of Floating Rate Savings Bonds 2020 (Taxable) scheme replacing 7.75% RBI Savings Bonds 2020 this week.

Let’s look at the features and eligibility of these bonds and understand if you should invest in these bonds or not.

What are floating rate savings bonds?

Floating means variable. Generally, when you invest in bonds you get fixed interest/coupon, but floating rate bonds will have variable interest rate and it will change as per changes in interest rates. So, when interest rates will go up, interest pay-out on these bonds will go up and vice versa.     

What is the tenure of these bonds?

These bonds will have a tenure of 7 years from the date of issue. Premature redemption is possible only in case of senior citizens. The minimum lock-in period for the age group 60 Years to 70 Years is 6 years. For 70 Years to 80 Years is 5 Years and for those whose age is beyond 80 years is 4 years.

What is the interest rate on these bonds?

The coupon on 1st January 2021 shall be paid at 7.15%. The interest on these bonds will be payable semi-annually on 1st January and 1st July of every year. The interest rate will reset every six months. The rate of interest will be linked to prevailing National Savings Certificate (NSC) rate with a spread of (+) 35 bps over the respective NSC rate. There is no cumulative option available.

Who can buy these bonds?

The bonds are open to investment by individuals (including Joint holdings) and HUFs. NRIs are not allowed to invest.

What is the tax treatment?

These bonds will be taxed under the income tax act 1961, means as per your tax slab.

Conclusion:

Why you should Invest?

• Interest on fixed deposits have fallen below 6% for the similar period.
• Interest rate is higher on Senior Citizen Savings Scheme (SCSS) and Pradhan Mantri Vaya Vandana Yojana (PMVVY); but there is a limit on maximum investment and only senior citizens can invest.
• Recent defaults and liquidity crunch have made Debt mutual funds risky and volatile. On the other hand, Floating Rate Bonds are safe as they have sovereign guarantee.

Who should Invest?

Investors who have enough liquidity & surplus money and who are looking to diversify their investment portfolio. Also, senior citizens looking for regular income flow can consider investing in these bonds.