The interest rate of RBI Floating Rate Savings Bonds (FRSB) 2020 (Taxable) is reviewed semi-annually and it is due for revision on January 1, 2024. At present, it offers an interest rate of 8.05% per annum. This is one of the highest interest rates offered on safe fixed-income products and many investors want to know if this rate will continue for another six months or not. To understand, how much returns you can expect from RBI Floating Rate Savings Bonds (FRSB) 2020 next year, you need to know how the interest rate is calculated. Let us explain.
How the interest rate of RBI Floating Rate Savings Bonds 2020 (Taxable) is calculated
The interest rate of RBI Floating Rate Savings Bonds 2020 (Taxable) is not fixed. It is linked to the interest rate of the National Savings Scheme (NSC), a small savings scheme offered by the Union government. RBI Floating Rate Savings Bonds will pay 0.35% higher than what NSC offers. The interest rate of NSC is reviewed every quarter along with other small savings schemes. If the interest rate on NSC goes up, then the RBI Floating Rate Savings Bonds 2020 (Taxable) will offer a higher interest rate accordingly. Similarly, if the interest rate of NSC goes down, the interest rate on the RBI Floating Rate Savings Bonds will also come down.
Now, NSC offers an interest rate of 7.7% for the October-December quarter of 2023. Going by the formula, the interest rate of RBI Floating Rate Savings Bonds 2020 (Taxable) will continue to offer 8.05% (7.70% +0.35%) from January 1, 2024.
As the interest rate of NSC has not gone down during the December quarter, the interest rate of RBI Floating Rate Savings Bonds 2020 (Taxable) is likely to remain unchanged during its next reset date Jan 01, 2024.
A return of 8.05% is quite attractive
An interest rate of 8.05% appears attractive when compared to other fixed-income instruments with a similar nature such as fixed deposits and other post office schemes. For instance, a five-year fixed deposit offered by the State Bank of India (SBI) — the biggest public sector bank — fetches an interest rate of 6.5%. Prominent private sector banks such as HDFC Bank, ICICI Bank, and Axis Bank offer an interest rate of 7% on fixed deposits maturing in five years. Interest rates of five-year fixed deposits in public and private sector banks are currently hovering between 5.75% and 7.25%.
Among small savings schemes, the Senior Citizens’ Savings Scheme (SCSS) offers an interest rate of 8.2% while the Sukanya Samriddhi Yojana scheme offers an interest rate of 8% for the October-December quarter, of 2023. Senior Citizens’ Savings Scheme is available for only senior citizens or those who are above 60 years, while the Sukanya Samriddhi Yojana can be opened in the name of a girl child only any time before she attains 10 years. So, other investors cannot take the benefits of these two schemes.
“The higher yield on RBI Floating Rate Savings Bonds 2020 (Taxable) would make a lot of eminent sense to most Indian investors. It is a combination of rates, periodicity of payment, and tax regime making RBI Floating Rate bonds more attractive,” says Nehal Mota, Co-Founder & CEO, of Finnovate.
Key things to keep in mind while investing in RBI Floating Rate Savings Bonds 2020 (Taxable)
RBI Floating Rate Savings Bonds 2020 (Taxable) are issued by the Reserve Bank of India (RBI) on behalf of the Government of India. They have a lock-in period of seven years. 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.
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.
Should you invest in RBI Floating Rate Savings Bonds 2020 (Taxable)?
Considering its floating rate nature, even if the interest rate of these bonds increases in the next reset, will it be a good investment option now? Explaining this, Anand Dalmia, Co-founder & CBO of Fisdom, a wealth tech platform, said, “Most interest rate hikes in the current cycle are behind us. Once we reach the terminal rate, the rate environment can be expected to plateau for longer or at least not reverse in haste. In the short term, the expected rate of return of 8.05% on these floating-rate savings bonds, taking into account the spread over NSC rates, is quite attractive for investors looking for a safe fixed-income investment over the long term. However, investors must be aware that a quicker and prolonged reversal in interest rates could pose a risk to their returns over the holding period.”
The Reserve Bank of India kept the policy repo rate unchanged at 6.5% for the fifth consecutive time in its bi-monthly monetary policy meeting held in December 2023. The interest rates of fixed deposits are more or less at their peak now. In the current scenario, these RBI Floating Rate Savings Bonds 2020 (Taxable) present a compelling opportunity for investors seeking a safe fixed-income instrument with a longer-term investment horizon, according to many experts.
On the future outlook of policy rates, Anshul Gupta, Co-Founder and Chief Investment Officer, of Wint Wealth, says, “We expect that the key policy rates will come down post Q2 2024. Gradually, the market will start factoring this, which will have a downward impact on the FD returns of various banks, small finance banks, and NBFCs.”
Do remember that when the interest rate of these bonds reduces in the future, the returns will come down. So, the investors must be prepared for that scenario as well. However, these bonds will still offer one of the best rates in prevailing market conditions.
