The pandemic COVID-19 has severely affected people all over the world. To save and prop up their economies, the central banks across the globe have been cutting interest rates. The return on traditional investments (such as time deposits) has been declining.
Therefore, in this case, for those seeking higher fixed returns, investment options are limited. Especially the investment options for the elderly have become limited.
During this tempestuous period, the Reserve Bank of India’s floating-rate savings bonds is one of the more reliable options for those seeking regular returns.
After the central bank stopped issuing its 7.75% fixed-rate bonds, it introduced a new floating-rate savings bond with an interest rate of 7.15%.
What is a Floating Rate Bond?
Floating rate bonds are slightly different from regular bonds that pay fixed interest rates. These are the five characteristics of these bonds.
1. Unlike ordinary bonds that pay fixed interest rates, floating rate bonds have variable interest rates.
2. The interest rate of floating-rate bonds is linked to the benchmark interest rate and resets at regular intervals.
3. Interest rate risk has been greatly reduced because these bonds will pay higher returns when prevailing interest rates are high.
4. When investing in floating-rate bonds, the future stream of income is uncertain.
5. The most desirable time to purchase floating-rate bonds is when the rates of interest are low and are supposed to rise.
Experts also said that the floating-rate bonds issued by the Reserve Bank of India currently provide a guaranteed return of 7.15%, which is an attractive investment option for those who wish to obtain higher fixed returns.
Here is all the information you need to know about the main characteristics of the Reserve Bank of India’s floating-rate bonds.
Who can invest in the Floating rate bonds?
Only Hindu Independent Families (HUF) and resident individuals are eligible to invest in these bonds. Individuals can apply for these bonds individually or jointly. A person can invest as a caregiver or guardian in the name of a minor. However, non-resident Indians and people of Indian descent are not allowed to invest in these bonds.
How much can you invest?
The minimum investment requirement for the bond is 1,000 rupees, and the maximum investment is unlimited.
What is the maturity period of these bonds?
These bonds are valid for seven years, and your investment will remain locked for the entire seven years. Only specified categories of senior citizens can redeem in advance.
How much is the interest, and how should it be paid?
The interest rate on these bonds is paid on a semi-annual basis. After each interest payment, the interest rate will be reset according to the prevailing interest rates in the economy. The first interest payment tranche will be due on January 1, 2021. There is no option to receive accrued interest on the maturity date of these bonds. When applying for the bond, you must provide your bank account details because the interest will be directly credited to your account.
How will the interest be taxed?
The interest earned on the floating rate saving bonds will be completely taxable. The amount of interest will be added to your annual income and will be taxed according to your tax slabs. In addition to this, TDS will apply to interest income.
How to invest in floating-rate bonds of the Reserve Bank of India?
You can invest in these bonds through state-owned or nationalized banks or select private sector banks such as HDFC Bank, ICICI Bank, and Axis Bank. Up to 20,000 rupees can be invested by cash payment. The higher amount must be paid by cheque. You can also use the online investment method. Bond applications in the form of bond ledger accounts will be received in designated branches of nationalized banks, SBI, Axis Bank, IDBI Bank, ICICI Bank, and HDFC Bank. The bonds will be issued only electronically and are held to the holder’s credit in a Bond Ledger Account opened with the receiving office.
Drop-out Early or Premature withdrawal:
Only seniors over 60 years old are eligible to drop out early. Premature encashment is allowed for people aged 60 to 70 years after six years. People between the ages of 70 and 80 can withdraw after 5 years. People over 80 can quit after four years. However, if the funds are withdrawn early, 50% of the interest rates due and payable in the last six months of the holding period should be recovered from the investment amount.
Key Points to Remember
- The sole holder or a single surviving holder of the bond can make a nomination as an individual.
- The bond does not meet the conditions for trading in the secondary market and cannot be used as collateral for loans from banks, NBFCs, financial institutions, etc.
- Bonds in the form of BLA cannot be transferred unless assigned to a legal heir/ nominee in the case of the death of the bondholder.
For joint investments, if in case of the single or joint holder deaths, the individual can choose to nominate anyone to receive payments based on these bonds. One or more people can be nominated. Separate nominations can also be made for various investments in bonds.
Thus, the Reserve Bank of India’s floating rate bonds is a good choice for term deposit investors who want to lock in their credits for seven years and have higher yields than bank deposits.