RBI Floating Rate Savings Bonds 2020

In the current debt market where interest rates are low and investments may be at credit-risk as well as interest-risk, RBI Bonds come as a breath of fresh air for many investors looking for a lumpsum debt based investment.

About the RBI Bonds
These bonds have been made available for subscription on July 1, 2020, and you can invest in these bonds through public sector banks and select private sector banks like HDFC Bank, Axis Bank, ICICI Bank, and IDBI Bank. RBI has opened up the subscriptions for the Bonds through the permitted 16 Banks.

The bonds are issued only in electronic form and held in the Bond Ledger Account (BLA). The BLA is an account with RBI or an agency bank in which the bonds are held. The investor, in this case, receives a Certificate of Holding from RBI/Agency Banks.

Investment Amount
- The Bonds will be issued for a minimum amount of INR 1,000 (face value) and in multiples thereof. 
- There will be no maximum limit for investment in Bonds. This comes up as a big positive for these bonds.

Coupon Rate / Interest Payable
- The interest rate of the bond, would be re-set half yearly starting with Jan 1st, 2021 and thereafter every July 1st and will be liked with the prevailing National Saving Certificate (NSC) rate with a spread of (+) 35 bps over the respective NSC rate.
- Accordingly, the coupon rate for first coupon period i.e. July 1 to Dec. 31, 2020 payable on Jan. 01, 2021 was arrived at 7.15% (6.80%+0.35%).
- All subsequent coupon reset would be based on the fixation of rate of interest on NSC on Jan 01 and July 01 following the above methodology.
- As on writing this post, there has been no change in the interest rates of these bonds. This is a great news that the bonds have sustained the low interest rate scenario in the market. This could be majorly due to political constraints of the government, unlike debt mutual funds which react to true market scenarios. Such political constraint does help the investor.
- The interest rate is floating rate of interest with a half yearly interest payout.
- The interest on bonds is payable semi – annually with resetting of coupon rate every 01 January and 01 July with last instalment on date of redemption.
- The interest on the bond accrues from the date of receipt of fund/realization and will be credited to bank account of the holder directly,

Liquidity and Redemption
- The redemption of the bonds is due on expiry of seven (7) years from the date of investment, unless applied for premature redemption as applicable.
- However, premature withdrawals are permitted (only to individual investors) subject to a minimum lock-in period that is based on the age of the holder.
- Depending on the age bracket of the individual investor, the lock-in period from the date of issue is reduced as follows:
a/ from 18 - 60 years of age, lock in stays as 7 years.
b/ from 60 - 70 years of age, lock in will be 6 years.
c/ from 70 - 80 years of age, lock in will be 5 years, and
d/ for 80 years and above age, lock in will be only 4 years. 
- This makes it a wonderful bet for senior citizens who rely on Senior Citizens Savings Scheme (SCSS) and PM Vaya Vandana Yojana (PMVVY) who have a limit to the maximum amount that can be invested, and that too with a longer lock in.

Taxation
- The interest income from the bonds is fully taxable.
- TDS (Tax Deducted at Source) is deducted at the time of interest payment as per the prevailing IT rules.
- If you wish to avail tax exemption for your interest / maturity payments of RBI Bonds, the valid exemption documents viz., 15G / 15H / Low Tax / No Tax documents to be made available in the banks records one month prior to the actual interest / maturity payment date.
- RBI Floating Rate Savings Bonds does not qualify for any capital gains exemption.
- The Bonds will be exempt from Wealth-tax under the Wealth- tax Act, 1957.

Nomination
- As with any investment, it is strongly recommended that the nomination option is filled up in order to avoid inconvenience later.
- A sole holder or all the joint holders may nominate one or more nominees to the rights of the bonds, Non-resident Indians can also be nominated.
- The investor(s) can make separate nomination for each investment held under the BLA
- Nomination facility is not available in case the investment is on behalf of the minor.

Risks
- 100% credit risk free investment option
- Interest rate risks remain. However, since the interest rates are only expected to go higher from here, it may turn out only to the benefit of the investor.

Who can invest?
- An Individual, not being a Non-Resident Indian (NRI). NRIs are not allowed to invest in these bonds.
- An A Hindu Undivided Family (HUF).

Transferability
These bonds are not transferable.

How to invest?
Until a few months back, the process to invest in these bonds was quite cumbersome. But some of the private sector banks like HDFC Bank and ICICI Bank have now developed online investing in these binds via their respective net banking websites.

Other Points
- The Bonds are not tradeable in the Secondary market.
- These bonds are not eligible as collateral for loans from banking institutions, non-banking financial companies or financial institutions.

Merits Summary
- High interest rates
- Floating Interest rates
- Credit Risk free investment option
- Fixed income
- Regular Cash flow (every 6 months) 

Demerits Summary
- 100% taxable
- Interest rate risks (negligible in the current market)

- Non cumulative (Interest is mandatorily payed out to you and therefore, does not cumulate)

- Illiquidity (4 years to 7 years depending upon your age)

Conclusion
In todays market of low interest rates where credit risks are also a definite reality, it is best to get into something which is 100% guaranteed by the government and provides reasonable interest rates. In fact, this investment option scores over PPF (Public Provident Fund) in terms of lock-in as well as interest rates - just that the interest is taxable. Since PPF has an upper limit, so it makes all the sense for someone with a lumpsum spare amount (which is not needed for the next 7 years) to get into such bonds and enjoy a stress free interest - a rate which is only likely  to go up from here. 

Of course, the investment made in such debt based investments with illiquidity should be in line with your investing strategy and liquidity needs.

Regards

Manoj Arora
Official Website