Investors who are looking at fixed income investment avenues such as bank fixed deposits, NSC or KVP may consider investing in Floating Rate Savings Bonds.
By Mohit Mittal
After the suspension of GOI 7.75 per cent Savings Taxable Bonds 2018 from June 1, 2020, Government of India has decided to launch Floating Rate Savings Bonds 2020 (Taxable) scheme, with effect from July 01, 2020.
Though Floating Rate Savings Bonds are coming up with very much similar features which GOI 7.75 per cent Bonds were offering but there are few important modifications as well which are quite important for an investor to know and understand well while investing.
As the name represents, these Bonds are offering Floating Rate which will keep on changing every 6 months on Jan 1 and July 1. The coupon rate will be linked or pegged with prevailing National Saving Certificate (NSC) rate with a spread of 35 basis points over the respective NSC rate, which means if the current NSC Rate is 6.80 per cent, then Floating Rate Savings Bonds will offer 6.80 per cent + 0.35 per cent which is 7.15 per cent for next 6 months and same will be revised on Jan 1, depending on the changes in NSC Rate.
The coupon rate for the first coupon period, payable on January 1, 2021, is fixed at 7.15 per cent.
There is no Cumulative Option in these Bonds, hence Applicable Coupon Rate will be paid to the Investors on Half-Yearly basis i.e. on Jan 1 and July 1 every year. We can also say these Bonds are suitable for Retail Investors seeking the highest safety and regular income.
Any individual, not being a Non-Resident Indian; either in Individual Capacity or on a joint basis can invest in GOI Bonds. Minors through Guardian and HUF (Hindu Undivided Family) can also invest in these Bonds.
The interest received on the Bonds will be taxable under the Income Tax Act, 1961 as applicable according to the relevant tax status of the Bondholders. The TDS is applicable on the Interest Income, while eligible investors have the option to submit Form 15G/H.
Since the Bonds are not tradeable in the Secondary Market, same can be redeemed at the time of maturity only. While, keeping in mind the need for Senior Citizens, Floating Bonds also offer liquidity in terms of Pre-maturity withdrawal options for any senior citizen depositor i.e. the lock-in period for investors at the age of 80 years and above shall be 4 years from the date of issue and after 4 years, Investor can apply for withdrawal with applicable minimum deduction charges. Similarly, lock-in for Investors in the age bracket of 70-80 years shall be 5 years and for 60-70 years shall be 6 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 fulfil the above conditions of eligibility.
Who should invest?
The Bonds doesn’t offer Fixed returns till maturity and will keep on changing every 6 months, depending on the prevailing NSC Rates. Still, investors who are looking for fixed income investment avenues such as Bank Fixed Deposits, National Savings Certificate (NSC) or Kisan Vikas Patra (KVP) may invest to get higher interest rates offered in Floating Rate Savings Bonds (taxable). The Bonds are suitable for investors who are not falling under tax liability or who have an exemption under the Income Tax Act. Also, those who are having a conservative approach in investing can also include Floating Rate Savings Bonds 2020 in their Portfolio, since the Bonds are Sovereign in nature and carry guaranteed returns.
(The author is Product Head Investment, Bajaj Capital)