The corporate debt market, lately, gave investors some jitters with delays and defaults in interest payments and principal repayments. If you are looking for a safe haven with reasonable returns, RBI Savings Bond is an option.
These bonds, known as 7.75% Savings (Taxable) Bonds, 2018 or RBI savings bonds (in general), have a tenure of seven years and come with cumulative and non-cumulative options.
These bonds look attractive when compared with many fixed-income options. If you are looking for periodic income, the non-cumulative option, with its attractive interest rate and half-yearly interest payments, is a good choice. If you are seeking cumulative investment, these bonds can be considered after you have exhausted your Section 80C investment limit or if your income is within the tax-exempt limit of ₹5 lakh. With half-yearly compounding, the yield on the cumulative bond comes to 7.9%, comparable with the National Savings Certificate (NSC) and the 5-year post office deposit without considering tax breaks. Conservative investors looking for safety can park a portion of their surplus in the RBI savings bonds.
Decent returns
In the present scenario where the repo rate and yield on the 10-year G-Sec are heading downward, the interest rate of 7.75% per annum offered by the RBI bonds seems good.
On fixed deposits (FD) of 5-year tenure, while private sector banks offer 7.25-7.5%, public sector banks offer a lower 6.25-6.75% per annum.
Though small finance banks offer higher rates of interest, accessibility could be an issue due to their limited presence. Also, while FDs in banks are insured up to ₹1 lakh for both principal and interest. Investment in the RBI bonds are completely guaranteed.
The RBI Savings Bonds are one of the safest investment options as it is issued by the RBI on behalf of the Government of India.
Individuals and Hindu Undivided Families are eligible to purchase these bonds with minimum investment of ₹1,000 and with no upper limits. Non-Resident Indians are not allowed to invest in these bonds but they can be nominated to receive the proceeds in case of death of the primary owner.
The bonds will be issued in demat form and credited to the Bond Ledger Account (BLA) of the investors. But these bonds are neither tradeable in the secondary market nor transferable. They are also not eligible to be used as collateral for getting loans from banks, financial institutions and non-banking financial companies.
While interest on cumulative bonds is paid at the time of maturity along with the principal, interest on non-cumulative bonds will be paid half-yearly – on August 1 and February 1 for period ending July 31 and January 31 respectively.
Investments in these bonds are not eligible for tax benefit under section 80C of the Income Tax Act. Interest income, too, is taxable as per the investor’s income tax slab rate. A 10% TDS will be deducted at the time of interest payment if the total interest income in a year exceeds ₹40,000 in a year.
You should invest in these bonds only if you can lock-in your investment for 7 years. However, the lock-in condition is relaxed for senior citizens. For the investors in the age bracket of 60-70 years, 70-80 years and above 80 years, the lock-in period is 6,5 and 4 years respectively. Even so, the penalty for pre-mature withdrawal after the lock-in period is 50% of the interest due and payable for the last six months of the holding period. You can buy the bonds from the Stock Holding Corporation of India or any of the branches of the nationalised banks and few of the private sector banks such as ICICI Bank, HDFC and Axis Bank. They can also be bought through demat accounts maintained with your broker.
