Floating Rate Saving Bonds

Floating Rate Savings Bonds 2020 (Taxable): All you Need to Know

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What are Floating Rate Savings Bonds 2020?

The Government of India launched a new investment scheme named Floating Rate Savings Bonds 2020 after the suspension of the GOI 7.75 percent Savings Taxable Bonds 2018. The older investment scheme GOI was offering a 7.75 fixed interest rate. But the new scheme from 1st July 2020, offers Floating Interest Rate. This means the interest rate may change every six months. So, one can see the first reset value of the floating rate on 1st January 2021. Now, the current interest rate is 7.15 percent. This change of interest rate is based on the National Saving Certificate (NSC) rate. 

Features of Floating Rate Savings Bonds 2020

  1. Floating Rate Savings Bonds 2020 has varying interest rates that change every six months. Investors have to pay the interest amount every six months, and after that, it will vary.
  2. The Interest Rate is 7.15% for the first six months, and it consists of the 35 basis points and NSC rate. So, if you add 35 basis points to the 6.8% NSC rate. You will get 6.8% + 0.35% = 7.15%
  3. This bond is available for only Indian residents and the NRIs are not allowed to make investments in this scheme.
  4. Investors can purchase the bonds from certain banks such as IDBI, HDFC, SBI, and ICICI banks. The bonds are available for only Bond Ledger Account. An investor can buy the bond by paying a cash or cheque or demand draft or online payment. There is no maximum investment limit to buy the bonds.
  5. The general lock-in period for these floating bonds is seven years but varies for senior citizens. Investors in the age group of 60 to 70 have tenure of six years. Senior citizens in the age group of 70 to 80 can take the money after five years and for above 80, it is four years only.
  6. The returns that you get from this Floating Rate Savings Bonds 2020 Scheme get directly added to your income. Now, based on this total income, you need to pay taxes.
  7. One can’t trade these bonds but allowed to transfer it to another nominee after an investor’s death. 

Advantages of Floating Rate Savings Bonds

  • As this is an Indian Government Investment Scheme, there is no risk involved in it. Your money is safe and there is no risk on your payment of interests to the banks.
  • Most banks reduced the interest rate of FDs. But with this Floating Rate Savings Bonds Government Scheme, one can get good returns when compared to FDs returns.

Disadvantages of Floating Rate Savings Bonds

  • Since it is a Government Scheme, the returns that you get from this savings bond are taxable. Imagine that you invest more and get more returns. In such a situation, your returns will be more and the tax that you pay for the same will also be more.
  • Since the lock-in period for this scheme is seven years, it is not easy to convert your bonds into cash. If you want to close the bond earlier, you need to pay a penalty for it. Even for senior citizens, the lock-in period is lengthy i.e., four years.
  • As the interest rate keeps changing every six months, the returns that you get will also keep changing. As already said, the interest rate will vary for every six months, you will get any fixed returns.

Who can invest in these bonds? 

To invest in this Floating Rate Savings Bonds 2020 Scheme, only Indian residents or Hindu Undivided Families (HUF) can invest here. No NRIs can invest in these bonds. Individuals or Joint Holdings residing in India are eligible to invest in this scheme. Investors who are looking for higher interest rates can invest in this scheme. These bonds are best for those investors having an exemption under the Income Tax Act.  

How much can you invest? 

Coming to the investment amount, one can invest the minimum amount of Rs 1,000 for this scheme. But there is no maximum limit for the amount to invest in these bonds. The maximum amount can go in the multiples of Rs 1,000.

What is the tenure of the bonds?

One can get the returns of these bonds after the expiration of Seven Years from the issued date of bonds. But the tenure varies for senior citizens of the country.

Age Group

Tenure of the Bonds

60-70 years of age group

Six Years of Tenure

70-80 years of age group

Five Years of Tenure

Above 80 years of age

Four Years of Tenure

How much is the interest and how will it be payable?

One can’t pay the interest amount on a cumulative basis. An investor has to pay the interest every six months once. For example, 1st January to 1st July is the period for which investors have to pay interest.  The rate of interest is 7.15%, which will get reset in January 2021. Once the investor creates any due of interest, then the amount will reach the investor’s account before the maturity period. 

How will the interest be taxed?

As already said, the returns from these bonds are taxable, it will vary as per the income tax slab. Both your income and returns are added together to calculate your taxes. TDS is also applicable here. 

How to invest in these bonds?

Investors can invest in these bonds in the form of cash or cheque or DD or online payment modes. One can invest cash of up to Rs. 20,000. Some of the major banks such as SBI Bank, HDFC Bank, ICICI Bank, Axis Bank, and nationalized banks will receive the applications for these bonds. The investor account should be a Bond Ledger Account. This scheme allows these bonds to be issued only in electronic form and kept at the bond ledger account. One cannot use these bonds to trade in the secondary market, but transferable to your interested nominees in case of death of the bondholder.

Holding Mode

One doesn’t need a Demat account to invest in the floating bonds. But the bonds require the Bond Ledger Account (BLA). As a proof of subscription, the bank issues a BLA holding certificate.

Premature Exit from Scheme

Senior citizens of India can get a premature exit from these bonds. Also, for senior citizens, the lock-in period is a minimum of 4 years. When anyone makes a premature exit, they have to pay the penalty of 50% of the interest rate available over the last six months.

Difference Between Floating Rate Savings Bonds, SCSS, PMVVY, and Fixed Deposits

 

 Scheme  RBI Floating Rate Savings Bonds  PMVVY  SCSS  Bank Fixed Deposits
 Age Limit There is no age limit Only for senior citizens Only for senior citizens There is no age limit
 Maturity Period 7 years 10 years 5 years Multiple
 Maximum Investment There is no limit for maximum investment but the minimum amount is 1000 Rs. 15 lakhs per person Rs. 15 lakhs per person There is no limit
 Interest Rate NSC interest rate + 0.35% 7.4% per annum 7.40% per annum The interest varies based on different banks
 Interest payment Six months once i.e., January 1 to July 1 Monthly or Quarterly or Half-yearly or Annually Quarterly Monthly or Quarterly or Half-yearly or Annually
Credit Risk No credit risk No credit risk No credit risk Low credit risk

Are Floating Bonds Good for Lower Tax Bracket?

Since the returns of the Floating Rate Savings Bonds 2020 Scheme are taxable, it is a good investment option for those who have income in lower tax brackets. For instance, if you are in a 30 percent tax bracket, you will get the returns for the first 6 months around 4.5%. Thus, if you fall in the tax bracket of 30%, these savings bonds may not be the best investment option. For such people, debt funds can be a better option than these bonds.

Is it Necessary to Invest in Floating Rate Savings Bonds?

In RBI Floating Rate Savings Bonds Scheme, credit risk is free. But the interest rate is taxable. This means that you may not get effective returns when you fall into the high-income tax bracket. Also, you can’t stay with one interest rate, as it will vary every six months. But, one can invest in these bonds, when your income falls under a low tax bracket. Also, this product is much helpful for senior citizens or retirees. You will understand this scheme easily, but the issue is the floating interest rate. Also, one has to understand the concept of interest rate linked with NSC. Thus, the interest rate is not a big issue, as it depends on economic growth.

The Bottom Line

The floating rate savings bond is a good scheme that benefits both the investor and the Government of India. Based on your income tax bracket, you can choose this scheme or go for other Government Schemes. The varying floating interest rate is not a big problem to concentrate on, as it depends on the Indian economy and NSC. If you want to buy these bonds, have a look into its features, pros, and cons, etc. then decide to buy these bonds. It is most helpful for senior citizens in the Indian economy.

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