Replacing the 7.75% Government of India Savings Bonds, Government announced the Floating Rate Savings Bonds, 2020 (Taxable). What are the features and eligibility of this Government of India Floating Rate Savings Bonds, 2020 (Taxable)?
What are Floating Rate Savings Bonds?
Usually, when you invest in Bonds, the coupon (interest) what you get is fixed throughout the period. However, in the case of floating rate bonds, the interest is not fixed and it changes as per the specified bond feature.
Hence, such bonds are sensitive to interest rate fluctuation. It is not like your typical Bank FD, where you know well in advance the interest rate payable by banks for the full FD tenure.
The term of the bond is fixed. However, if you are not interested to retain the bonds, then you can sell it in the secondary market at the prevailing price of the bond if such bonds are eligible to trade.
Government of India Floating Rate Savings Bonds, 2020 (Taxable) Features and Eligibility
In addition to above features, let me share certain important features of this bond.
# If holder of the bond turned NRI, then he can hold the bond up to maturity.
# The Bonds will be issued only in the electronic form and held at the credit of the holder in an account called Bond Ledger Account (BLA), opened with the Receiving Office.
# The interest on the bonds will be payable half-yearly from the date of the issue of the bond. Once on 30th June and another on 31st December yearly. As I mentioned above, there is no option of cumulate in this bond.
# The interest will change on a half-yearly basis starting from 1st January 2021. This interest rate is linked to the prevailing interest rate of NSC (Post Office National Savings Certificate)+35 BPS (100 BPS=Rs.1). Hence, the coupon rate of Floating Rate Savings Bonds, 2020 (Taxable) for the period of 1st July 2020 to 31st December 2020 is fixed at 7.15%. Because the current NSC interest rate is 6.8%+0.35%=7.15%.
Let us see the interest rate movement of the National Savings Certificate (NSC) from the year 2016 (where the Government started to announce the interest on a quarterly basis) to date. You noticed that it is falling slowly and in fact the current quarter fall was the steepest among all.
# Interest will be payable directly to the bond holder’s account.
# The bonds will repayable after the completion of 7 years. Premature withdrawal is allowed only for those whose age is 60 years and above subject to the submission of document relating to the date of birth proof. The minimum lock-in period for the age group 60 Yrs to 70 Yrs is 6 years. For 70 Yrs to 80 Yrs is 5 Yrs and for those whose age is beyond 80 years is 4 years.
# Even though you request for redemption as per your age slab, the redemption amount will be transferred with immediate next interest rate period. Hence, irrespective of your submission for premature withdrawal, Govt will process it either on 1st July or 1st January every year. Also, in such premature closure, Govt will deduct 50% of the last coupon payment.
Where to buy Government of India Floating Rate Savings Bonds, 2020 (Taxable)?
You can buy the Government of India Floating Rate Savings Bonds, 2020 (Taxable) at the belowing banks.
Where to approach if you have an issue with your bank in Government of India Floating Rate Savings Bonds, 2020 (Taxable)?
In case the issuing bank does not comply with the above, you may lodge a complaint in writing in the form provided at
the counter of the bank and address the same to the nearest office of Reserve Bank of India, as under:
THE REGIONAL DIRECTOR,
RESERVE BANK OF INDIA,
CONSUMER EDUCATION AND PROTECTION DEPARTMENT/ BANKING OMBUDSMAN (LOCATION)
You may also address your complaint to:
THE CHIEF GENERAL MANAGER
INTERNAL DEBT MANAGEMENT DEPARTMENT
RESERVE BANK OF INDIA, 23rd Floor
CENTRAL OFFICE, Shahid Bhagat Singh Marg,
E- mail ID – firstname.lastname@example.org
Government of India Floating Rate Savings Bonds, 2020 (Taxable) – Should you invest?
# Interest Rate Risk:-As your interest is linked to NSC and the feature of this bond is floating, you can’t expect the constant stream of income. It fluctuates as and when there is an up and down in NSC rates. Do remember that the only difference is in the case fo NSC, the interest rate will change on a quarterly basis. However, in the case of this bond, it changes once in a half year.
# Liquidity:-Liquidity is the biggest risk in such bonds. Because the tenure is 7 years. Certain premature withdrawal option is available for senior citizens and that also with the minimum period of holding 4 years, it turned to the highly illiquid product. Remember that these bonds can’t be tradable or transferable.
# Sovereign Guarantee:-As these bonds are issued by Government, there is no question of default risk. Hence, safety-wise, such bonds carry the highest degree of safety.
# Boon for those who are looking for a constant stream of income:-This bond is a boon for those who are looking for a constant stream of income. However, if you consider the other available options like Post Office Senior Citizen Savings Schemes or Pradhan Mantri Vaya Vandana Yojana (PMVVY), I feel this product is less attractive.
# Taxation:-This bond income is taxable. Hence, this bond is best suitable for those who are at a lower tax bracket. Also, do remember that there is a TDS on the interest that you receive.
Conclusion:-Comparing the Pradhan Mantri Vaya Vandana Yojana 2020 (PMVVY) or Senior Citizen Savings Scheme (SCSS), I think this bond is less attractive. However, in the case of PMVVY and SCSS, there is a maximum limit. But in this bond, there is no such maximum limitation. A combination of PMVVY, SCSS, and Government Floating Rate Savings Bonds, 2020 (Taxable) may be the best choice for senior citizens.
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