Are you looking to invest in a debt product with a floating interest rate, along with high safety, for a long investment tenure and without any investment limits? While it is difficult to find a single product with all the above features, the Floating Rate Savings Bonds 2020 (Taxable) comes very close. This article will explain what FRSB 2020 (T) is, its features, and whether it is a good investment product to consider.
As of August 2021, the rate-cutting cycle started by the Reserve Bank of India (RBI) after the COVID-19 outbreak seems to have ended. During its monetary policy meetings, the RBI has held interest rates steady for the last couple of quarters. Going ahead, over the next few quarters, the RBI is expected to gradually remove excess liquidity from the system and then start hiking rates. In the bond markets, the yield on the 10-year G-secs that had fallen below 6% some months back has already risen above 6.20%. Given the above interest rate scenario, in this article, we will explore whether retail investors should consider investing in Floating Rate Savings Bonds (FRSB) issued by the RBI.
These days, most big banks offer an interest rate of around 5%-6% p.a. on fixed deposits with a tenure of 1-5 years. Given this scenario, when interest rates are expected to go up in the coming months, should you now lock into the fixed deposit rates? Your answer will most likely be ‘No’. But then, should you let your money lie idle in your savings account at low interest rates? Again, your answer will most likely be ‘No’.
Should you consider floating rate bonds?
In the current situation, the best option for you is to invest in a debt security that pays a floating interest rate. As market interest rates go up, the interest rate of the debt security will be revised from time to time and vice versa. But then you might wonder about the safety and security of your money. Well, what if we tell you the security is issued by the RBI, the safest and most secure financial institution in the country?
We are talking about Floating Rate Savings Bonds 2020 (Taxable) issued by the RBI. This article will discuss FRSB 2020 (T), its features, and whether retail investors should invest in them.
What exactly is Floating Rate Savings Bonds 2020 (T)?
Floating Rate Savings Bonds, 2020 (Taxable) or FRSB 2020 (T) are being issued by the RBI with effect from 1 July 2020. The tenure of these bonds is seven years. Unlike other bonds that have a fixed coupon rate, these bonds have a floating interest rate. The interest rate on these bonds is reset twice a year on 1 January and 1 July. The interest rate on the bonds is linked/pegged with the prevailing National Saving Certificate (NSC) rate with a spread of (+)0.35% over the respective NSC rate.
On every 1 January and 1 July, the RBI will add 0.35% to the prevailing NSC interest rate, and accordingly, the FRSB 2020 (T) interest rate will be arrived at, which is applicable for the next six months.
Let us look at the features of this bond.
Any person resident in India can apply for these bonds. You can hold the bonds in an individual capacity or joint basis. If an individual becomes a Non-resident Indian (NRI) after purchasing the bond, they can continue holding the bond until maturity.
b) Investment amount
The minimum investment is Rs 1000 and multiples thereof. An individual can apply for bonds in the form of cash (up to Rs 20,000 only), cheque, draft, or an electronic mode of payment. There is no maximum limit for investment in bonds. An investor can apply for the bonds online or offline by filling in an application form, giving details such as name, full address, application amount, etc. They should make the payment along with the application form.
The RBI has appointed State Bank of India (SBI), nationalised banks, and some private banks as receiving offices where an application can be made for the bonds. The list of these banks has been given in the latter part of the article.
c) Issue of bonds
On realisation of payment, the bonds are issued in electronic format. The RBI will open a Bond Ledger Account (BLA) in the investor’s name. The bonds will be credited to the investor’s BLA. A certificate of holding will be issued to the investor as proof of bond subscription.
d) Interest rate
The interest on the bonds is payable at half-yearly intervals. The interest for the period 1 January to 30 June is paid on 1 July, and interest for the period 1 July to 31 December is paid on 1 January, every year. The interest will be credited to the investor’s bank account as per the bank details provided at the time of application.
As discussed earlier, the coupon rate payable on the bond would be reset half-yearly on 1 January and 1 July, every year. The coupon rate is linked/pegged to the NSC rate with (+)0.35% spread. For example, as of 1 July 2021, the interest rate on the NSC was 6.8% p.a. Accordingly, the interest rate for the bond was reset to 6.8% + 0.35% = 7.15% p.a.
The interest rate of 7.15% p.a. will apply for the six months from 1 July 2021 to 31 December 2021. On 1 January 2022, the interest rate will be reset based on the then prevailing NSC rate with a spread of (+)0.35%.
e) Taxation of bonds
The interest earned on bonds is taxable. The interest income will be added to the investor’s overall income and taxed as per their income tax bracket. The payment of half-yearly interest is subject to Tax Deducted at Source (TDS).
f) Repayment on maturity
The bonds have a tenure of 7 years. On maturity, the RBI will make the principal repayment to the investor’s bank account. The lock-in period is also 7 years. However, this is lower for those aged over 60, and premature redemption is possible with a penalty. You can check the details on the RBI website.
The investor can appoint nominees in the prescribed format. They can make a separate nomination for each investment in the bonds. They can also modify or cancel the existing nomination by making an application in the prescribed format.
The investor cannot transfer the bonds to anyone else. The only exception is the transfer of bonds to the nominee/s in the event of the investor’s death.
i) Trading of bonds and loan against bonds
The bonds cannot be traded in the secondary market. You cannot avail of any loan against the security of these bonds.
List of banks accepting applications for FRSB 2020 (T)
Note: The above list is as of 9 August 2021. Please check the source link for the latest list.
Should you invest in Floating Rate Savings Bonds 2020 (T)?
You must be wondering whether you should invest in these bonds. Let us answer this question by evaluating the product on some parameters that investors look for in any investment product.
- Rate of return: The current rate of return (7.15% p.a.) is better than that offered by bank fixed deposits. Also, this is a floating rate product. We are currently in a rising interest rate scenario. So, going forward, as and when market interest rates go up, the interest rates on this product will also go up, and you will benefit from it.
- Regular source of income: The product can provide you a regular source of income as it pays interest amounts on a half-yearly basis. So, if you are a retired person or someone looking for regular income, you may consider this product.
- Safety of money: The bonds are issued by the Reserve Bank of India. So, the product comes with the highest safety.
- Lock-in period: The bonds have a lock-in period of 7 years. However, senior citizens can do premature redemption with a shorter lock-in period and penalty. Also, you cannot avail of any loan against the security of bonds. So, if your investment time horizon is of 7 years, you could consider FRSB 2020 (T).
- Investment limits: There is no maximum investment limit. Also, it is always open for subscription. You can also invest regularly in this product. If you have exhausted your Section 80C investment limit but want to invest more in debt products, FRSB 2020 (T) is worth considering.
- Tax benefits: There is no tax benefit under Section 80C at the time of investing in this product. Also, the interest earned on the bonds is taxable.
If you are looking to invest in a debt product with a floating interest rate, highest safety, long investment tenure, and no investment limits, Floating Rate Savings Bonds 2020 (Taxable) is a good investment product to consider.
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