Are you looking for a safe debt investment that offers more than an 8% interest rate? Then, let me tell you about the RBI Floating Rate Savings Bonds (FRSBs) 2020 (Taxable). At present, the RBI Floating Rate Savings Bond offers an interest rate of 8.05% per annum, quite attractive among debt investment options. Will this high interest rate continue? How is the interest rate of RBI Floating Rate Savings Bonds calculated? If you invest in RBI Floating Rate Savings Bonds now, what should you keep in mind? ET Wealth Online brings you a primer on RBI Floating Rate Savings Bond.
How interest rate of RBI Floating Rate Savings Bonds is calculated?
As the name suggests, the interest rate of RBI Floating Rate Savings Bonds 2020 (Taxable) is not fixed. The interest rate on a Floating Rate Savings Bonds is reset every six months and due on July 1, next. It is linked to the interest rate of the National Savings Certificate (NSC), a small savings scheme backed by the Union government. The interest rate of RBI Floating Rate Savings Bonds is 0.35% higher than what NSC offers. Now, the interest rate of NSC is reviewed every quarter. When the interest rate of NSC goes up, the interest rate of RBI Floating Rate Savings Bonds will increase. Similarly, when the interest rate of NSC goes down, the interest rate of the RBI Floating Rate Savings Bond will also go down.
Will RBI Floating Rate Savings Bonds continue to offer 8.05% interest from July 1, 2024?
Now, NSC offers an interest rate of 7.7% for the April-June quarter. Going by the set formula, RBI Floating Rate Savings Bond 2020 (Taxable) will continue to fetch a high interest rate of 8.05% from July 1, 2024, for the next six months.
RBI Floating Rate Savings Bonds: Key features you must know before investing
Before you invest in RBI Floating Rate Savings Bonds for the high-interest rate, you must check out its features. RBI Floating Rate Savings Bonds 2020 (Taxable) are issued by the Reserve Bank of India on behalf of the Government of India. They come with a lock-in period of seven years.
The interest rate of RBI Floating Rate Savings Bonds will be reset twice in year. Investors will get the interests semi-annually — January 1 and July 1 every year. The interest is taxable in the hands of the investors. You can not claim any tax deduction for investing in these bonds.
There is no premature withdrawal option, but senior citizens can prematurely withdraw money with a penalty after a minimum lock-in period. For those aged 60 to 70, the lock-in period will be six years. For those aged 70 to 80, the lock-in period will be five years. Those aged above 80 can withdraw their investment after four years from the date of investment.
Are RBI Floating Rate Savings Bonds a good investment option?
When compared to fixed deposits in banks, only a handful of banks offer an interest rate of 8% on deposits. Most well-known banks offer interest rates of around 7 to 7.85% on fixed deposits. So, if you only go by interest rates, RBI Floating Rate Savings Bonds offer slightly higher returns with sovereign guarantees. While interest rate on fixed deposits are typically locked at the time of entry, the interest rate on RBI Floating Rate Savings Bonds may fluctuate during the tenure of the bond. Some time the volatility may benefit the investors when the rates go up and some time it may result in loss of interest as well if the rates come down in future.
Therefore, investors should keep two limitations — floating interest rate and no liquidity option for general customers — in mind while parking money in RBI Floating Rate Savings Bonds.
Despite these limitations, RBI Floating Rate Savings Bonds could be attractive to many investors. Raghvendra Nath, Managing Director – Ladderup Wealth Management Private Limited, says, “It is no doubt one of the highest-yielding debt instruments available in India currently, so anybody who has excess liquidity and does not need the money for seven years can look at it.”
Investors who want to safely park their money and earn a regular interest may go for RBI Floating Rate Savings Bonds. “However, the investors should bear that when the interest rates fall, their pay-out will reduce. Thus, they should not rely on floating rate bonds to generate a consistent income,” said Anshul Gupta, Co-founder and Chief Investment Officer, of Wint Wealth.
If you are planning to invest in RBI Floating Rate Savings Bond, keep in mind that interest rates seem to be at their peak and are expected to stay elevated for at least a quarter or two before rates start coming down, says Nath.
Bhavik Thakkar, CEO, of Abans Investment Managers, says, “While bank FD rates have a higher correlation to repo rate change, NSC rates do not witness such volatility. In the last 10 years, NSC rates have seen the highest of 8.5% and the lowest of 6.8%. Most banks today offer 7-7.50% for deposit tenures up to three to four years but lower rates for longer tenures. Compared to that RBI Floating Rate Bonds offer an investment period of seven years, an opportunity to get higher rates for longer periods with sovereign credit safety.”
