RBI’s New Floating Rate Bond Opens on July 1: Should You Buy at 7.15%?

RBI’s New Floating Rate Bond Opens on July 1: Should You Buy at 7.15%?

From July 1, RBI’s new Floating Rate Savings Bonds (FRS), 2020 will be open for public. These are 7-year floating interest rate saving bonds, currently offered at 7.15 per cent for first six months. The rate of interest will be reset every six months, i.e. the first reset will be announced on January 01, 2021.

Well, government has launched this FRS after withdrawing RBI’s Fixed Bonds which yielded 7.75%. While the previous bonds offered the option to receive the interest cumulatively at maturity, the interest on new RBI bonds is payable every six months.

Here is a run through the new savings bond scheme. At 7.15 % returns, the scheme offers a lower return than 2018 bond. Here is a comparison between the two bonds.

RBI floating rate bond 2020 vs. RBI fixed bond 2018

Parameter Floating rate bond Fixed rate bond

Issued on

July 1, 2020

January 2018

Expired on

May 28, 2020

Tenure

7 years

7 years

Interest Rate

  • Floating rate of return;
  • Rate to reset every six months;
  •  7.15 % for July 1- December 31, 2020;

Fixed at 7.75%

Minimum Investment

Rs 1000

Rs 1000

Max Investment

No upper limit

No upper limit

Interest payout

After 6 months

Optional; choose between cumulative or non cumulative payout

Collateral

Not Applicable

Can be used as Loan Collateral

Tax implication

Taxable

Taxable

Senior Citizens

  • 6 year lock-in for 60-70 years group
  • 5 year lock-in for 70-80 years
  • 4 year lock-in for above 80 years
  • 6 year lock-in for 60-70 years group
  • 5 year lock-in for 70-80 years
  • 4 year lock-in for above 80 years
 

Though the rate of return is lower than previous offering, the fact that the bond is backed by government of India makes it less risky than other investment options. In current times, you get peace of mind in regards to capital protection with these bonds. Besides, credit quality these are yielding higher than 5 year bank FDs and other fixed return schemes, except for senior citizen saving schemes & pension schemes. Currently Post Office Monthly scheme is offering 6.6% and National Saving Certificates are fetching 6.8%.

Frequently Asked Questions (FAQs)

✅ Who can invest in RBI’s floating rate bonds?

All resident Indians including individuals, Joint Holdings and Hindu Undivided Families (HUF) can invest. Non Resident Indians (NRIs) are not permitted to invest in these bonds.

✅ What is the threshold to invest in new bonds?

There is no limit set. You can start investing from a minimum of Rs 1,000. The investment can be made in multiples of Rs 1,000.

✅ What is the tenure of RBI bonds launched in 2020?

Just like previous bonds, the new RBI bonds that are introduced on July 1 come with a lock-in period of 7 years from the date of issue. Premature redemption is allowed to senior citizens.

✅ What are special senior citizens’ tenure privileges with RBI Bonds?

The liquidity flexibility for senior citizens is retained. The senior citizens in the age bracket of 60 to 70 years are allowed to opt for premature encashment after 6 years from the date of issue. While those who are between 70 to 80 years of age can withdraw funds after 5 years whereas super seniors above 80 years of age, have lock-in of 4 years.

✅ What is the rate of interest for new RBI bonds?

The interest rate on RBI bonds is based on floating rate. Currently it is fixed at 7.15%, i.e. 35 bps above NSC. It will be payable bi annually on 1st January and 1st July every year. The interest rate will also reset every six months. Cumulative payout option is not offered this time.

✅ What is the tax implication on RBI bonds?

Like previous bonds, interest received is taxable as per the tax slab applicable to the bond holder. TDS is also applicable on interest income.

✅ How to invest in RBI’s new bonds (2020)?

The FRS bonds will be issued in electronic form. The Bond Ledger Account will be opened with the Receiving Office. You can invest in RBI bonds as per your convenience. The mode of transaction can be cash (up to Rs 20,000), demand draft, cheque or electronic mode. The bonds can be purchased from any of the PSBs or major banks such as SBI, IDBI Bank, Axis Bank, HDFC Bank and ICICI Bank.

✅ Should I buy RBI’s new bond at 7.15%?

The bonds are issued at floating rate of interest and thus will yield attractively during rising interest rate rally. Furthermore, RBI has decided to set the rate of interest as 35 bps more than NSC certificate. Currently NSC is yielding 6.8% and thus at 7.15% the bond is attractive.

However there are certain points to note. These are:

  • A lock in of 7 years. Premature encashment allowed for senior citizens.
  • These bonds are not eligible for trading in the secondary market.
  • It cannot be used as collateral for loans.
  • The bond Ledger Account cannot be transferred, except in case of death of the holder. The transfer will be made to nominee or legal heir.

 

Also Read: Best Saving Option for Senior Citizens: Special FDs, PMVVY, or SCSS?

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