7.75% Government of India Savings Bonds -Should you invest?

Effective from 10th January 2018, the Government of India replaced 8% Government of India Savings Bonds with new 7.75% Government of India Savings Bonds. Let us see the features, benefits, and taxation of these bonds.

There was a huge unrest among many that Government stopped this bonds. However, Mr.Subhash Chandra Garg, Secretary, Department of Economic Affairs, Ministry of Finance, Government of India, clarified tweeting that they are replacing the old 8% Government of India Savings Bonds with new 7.75% Government of India Savings Bonds.

Based on his tweet, I am writing this post considering the fact that all features of 7.75% Government of India Savings Bonds will remain same as that of 8% Government of India Savings Bonds.

Who can invest in 7.75% Government of India Savings Bonds?

The 7.75% Government of India Savings Bonds may be held by –

(1) an individual, not being a Non-Resident Indian

(a) in his or her individual capacity, or
(b) in an ndividual capacity on joint basis, or
(c) in individual capacity on any one or survivor basis, or
(d) on behalf of a minor as father/mother/legal guardian.

(2) a Hindu Undivided Family (HUF).

In case of applications made in the joint names of more than 2 persons, the bond/s interest warrants and Payment Order/s will be issued in the name of the first applicant.

Limits of investment in 7.75% Government of India Savings Bonds

1) Minimum of Rs.1,000 can be invested and in multiples of Rs.1,000.

2) There is no maximum limit set.

Hence, the Face Value of the 7.75% Government of India Savings Bonds will be Rs.1,000.

What are the returns in 7.75% Government of India Savings Bonds?

The Bonds will bear interest at the rate of 7.75% per annum. Interest on non-cumulative Bonds will be payable at half-yearly intervals from the date of issue (The date of issue of the Bonds in the form of Bonds Ledger Account, will be opened (issued) from the date of tender of cash or the date of realisation of draft/cheque.) or interest on cumulative Bonds will be compounded with half-yearly rests and will be payable on maturity along with the principal.

In the cumulative Bonds, the maturity value of the Bonds shall be Rs.1,703 for every Rs.1,000 face value of the bond.

Interest to the holders opting for non-cumulative Bonds will be paid from the date of issue up to 31st July OR 31st January as the case may be, and thereafter half-yearly for a period ending 31st July and 31st January on 1st August and 1st February.

Interest on Bonds in the form of “Bonds Ledger Account” will be paid, by electronically by credit to bank account of the holder as per the option exercised by the investor/holder.

An advice of payment of interest will be issued to the investor one month in advance from the due date. Maturity intimation advice will be issued one month before the due date of the bond.

Facility for payment of interest and principal by ‘demand draft free of cost or at par cheques’ for up country customers is available. The facility of the intra-bank branch and interbank branch transfer of the bonds is available.

Do remember that you can’t change the bond option in middle from Non-Cumulative to Cumulative and vice versa.

Note:-You have to receive the redemption procedure at maturity or as and when the interest is payable. The government will not pay any interest on such interest income which is not claimed or any principal amount that also not claimed by investors.

Tenure of the 7.75% Government of India Savings Bonds

The bond tenure is 7 years from the date of issue. However, you can opt for premature redemption as per the Govt. Notification dated July 29, 2013, and subsequent amendment vide Notification dated August 16, 2013. It is discussed as below.

Premature encashment in respect of the Bonds shall be allowed for individual investors in the age group of 60 years and above, subject to submission of document relating to date of birth of the an investor in support of age to the satisfaction of the issuing bank, after minimum lock-in period from the date of issue as indicated below-

(a) Lock in period for investors in the age bracket of 60 to 70 years shall be 6 years from the date of issue.

(b) Lock in period for investors in the age bracket of 70 to 80 years shall be 5 years from the date of issue.

(c) Lock in period for investors in the age of 80 years and above shall be 4 years from the date of issue.

In case of joint holders or more than two holders of the Bond, the above lock-in period will be applicable even if any one of the holders fulfills the above conditions of eligibility.

After aforesaid minimum lock-in period from the date of issue, an eligible investor can surrender the bonds at any time after the 12th, 10th and 8th half year corresponding to the respective lock-in period but redemption payment will be made on the following interest payment due date.

Thus, the effective date of premature encashment for eligible investors will be 1st August and 1st February every year. However, 50% of interest due and payable for the last six months of the holding period will be recovered in such cases, both in respect of Cumulative and Non-cumulative bonds.

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

An earlier version of the bond period was 6 years.

Where to buy 7.75% Government of India Savings Bonds?

You can buy 7.75% Government of India Savings Bonds from designated branches of SBI and Associate banks,18 Nationalised banks, 3 Private Sector banks (like HDFC and ICICI Banks) and Stock Holding Corporation of India Ltd. I have listed them as below.

# State Bank Of India

# Allahabad Bank

# Bank of Baroda

# Bank Of India

# Bank Of Maharashtra

# Canara Bank

# Central Bank Of India

# Dena Bank

# Indian Bank

# Indian Overseas Bank

# Punjab National Bank

# Syndicate Bank

# UCO Bank

# Union Bank of India

# United Bank Of India

# Corporation Bank

# Oriental Bank Of Commerce

# Vijaya Bank

# IDBI Bank

# ICICI Bank Ltd.

# HDFC Bank Ltd.

# Axis Bank Ltd.

# Stock Holding Corporation of India Ltd.

Nomination facility under 7.75% Government of India Savings Bonds

The sole Holder or all the joint holders may nominate one or more persons as a nominee. Non-Resident Indians (NRIs) can also be nominated. However, remittance of the interest/maturity proceeds will be subject to the foreign Exchange regulations prevailing at the time of remittance.

If the nomination has been made in favour of two or more nominees and either or any of them dies before such payment becomes due, the title to the Bonds shall vest in the surviving nominee or nominees and the amount being due thereon shall be paid accordingly.

In the event of the nominee or nominees predeceasing the holder, the holder may make a fresh nomination. You can make a separate nomination for each investment.

The nomination is not allowed where the bonds are held in the name of the minor. A nomination made by a holder of a Bond can be changed by a fresh nomination in Form B, or as near thereto as may be, or may be canceled by giving notice in writing to the Receiving Office in Form C,

If the nominee is a minor, the holder of Bonds may appoint any person to receive the Bonds/amount due in the event of his / her / their death during the period the nominee is a minor.

You can change the nomination as and when you need.

Taxation of 7.75% Government of India Savings Bonds

Interest income from 7.75% Government of India Savings Bonds will be taxable. However, there is no wealth tax you have to pay. Tax will be deducted at source (TDS) while interest is paid.

The Bonds will be exempt from wealth-tax under the Wealth Tax Act, 1957.

I explained basic features in below image for your easy understanding.

How to hold the 7.75% Government of India Savings Bonds?

The Bonds will be issued in a Bond Ledger Account.

Where to complain in case of 7.75% Government of India Savings Bonds?

If you have any issue with Bank regarding this bond, then you can contact RBI directly using below details.

THE REGIONAL DIRECTOR,
RESERVE BANK OF INDIA,
CUSTOMER SERVICE DEPARTMENT/
BANKING OMBUDSMAN
(LOCATION)

Otherwise, you can also use the below address.

THE CHIEF GENERAL MANAGER IN-CHARGE
DEPARTMENT OF GOVERNMENT AND BANK ACCOUNTS
CENTRAL OFFICE
BYCULLA, OPP. BOMBAY CENTRAL RAILWAY STATION
MUMBAI- 400 008, MAHARASHTRA

7.75% Government of India Savings Bonds -Should you invest?

Let us now discuss about who should consider this bond.

# SOVERIGN GUARANTEE

The biggest positive point is that SECURITY of Government of India. No question of default risk in such bond. Hence, you can invest blindly without any doubt.

# INTEREST RATE

If you look at SBI FD Rate for 5 Yrs to 10 Yrs deposit, it is at 6%. Also, the current Post Office 5 Yrs FD rate is at 7.60%. Hence, I think this bond is definitely the BEST option who are looking for SAFETY and also the GUARANTEED return.

# GOAL-BASED INVESTMENT

I compared the interest of similar tenure products. Hence, do remember that invest in such bond only if your goal is 5 years or so. Also, if you are looking for some constant stream of income, then also you can look at such bond.

But never invest for the sake GUARANTEE and RETURN.

If your goal is more than 5 years or so, then use the products like LIC’s Jeevan Akshay VI or Pradhan Mantri Vaya Vandana Yojana. If you are a senior citizen, then you can opt for Post Office SCSS Scheme, which now offering you the interest rate of 8.3%.

# TAXATION

Whatever the return you will receive from this bond is taxable and also TDS is applicable. Hence, don’t rely on 7.75% return. But try to consider the post-tax return.

Suppose your income is less than Rs.2,50,000 then the effective return will be 7.75%.

Suppose your income tax slab is at 10%, then the effective return will be 6.975%

Suppose your income tax slab is at 20%, then the effective return will be 6.2%

Suppose your income tax slab is at 30%, then the effective return will be at 5.425%

#INTEREST RATE RISK

Even though there is no default risk, there is always an interest rate risk. We don’t know the applicable interest rate after 7 years of maturity. Hence, this interest rate risk is always there.

However, considering the past trend, I am not sure that the Government will close the subscription within 4-5 years.

Go ahead to buy these bonds based on the above points. Blindly for the sake of GUARANTEE and RISK-FREE return always not works.