Floating Rate Savings Bonds: Is It a Good Option For You?

‘Floating Rate Savings Bonds 2020 (Taxable)’, shortly known as ‘FRSB-2020 (T)’, is a type of bond issued by India’s government. You can subscribe to this bond from 1st July 2020. In this post, we will discuss its features, pros, and cons, compare it with other similar products, and finally, find out if it suits you. Let’s begin.

Features of Floating rate savings bonds

The government of India issues the Floating Rate Savings Bonds. You can visit any branches of State bank of India and other nationalized banks as well as four private banks HDFC Bank, ICICI Bank, AXIS Bank, and IDBI Bank, to subscribe to it. The minimum amount you require is Rs 1000, but there is no upper limit. You can pay for the bonds in cash (up to Rs 20,000), cheques, drafts, or electronic transfer. You will get a certificate of holding after you deposit the money. The tenure of these bonds is seven years from the date of subscription. It also comes with a nomination facility. However, there is no loan facility available in this bond.

Floating Rate of Interest

As the name suggests, the interest rate is not fixed. It will change from time to time and reset half-yearly. However, it is linked to the interest rate of NSC (National Savings Certificate) issued by the post offices. The interest rate of these bonds will be 35 basis points more than the NSC. To take an example, the current interest rate of NSC is 6.80%. Therefore, the interest rate of these bonds will be 35 basis points more. That means the current rate of interest will be 7.15% (6.80% + 0.35%). The current interest rate will be valid up to 1st January 2021. The interest rate of these bonds will change along with the interest rate of NSC after that. Therefore, it can go in both directions.

Interest pay-out

The interest accumulated will be paid out half-yearly. The dates of interest pay-out are fixed. They are on 1st January and 1st July. Thus, your first interest payment will be on 1st January 2021 if you subscribe now. There is no option for paying interest on a cumulative basis. In other words, there is no option to receive the interest at the end of the tenure. The interest will be credited to your bank account directly in electronic form on 1st January and 1st July.

Tax on floating rate savings bonds

There is no tax relaxation on these bonds. The interest earned will be added to your income, and you have to pay tax according to your tax slab. For example, if your annual income is 6 Lakh and you receive a yearly interest of Rs 50,000 from the bonds, then your taxable income would become Rs 6.5 Lakh rupees. Further, you have to pay tax according to your tax slab. Tax will be deducted at source while making payments from time to time to your savings account. However, you can submit Form 15G/15H on time, stating that you have no taxable income and avoid the inconvenience.

Lock-in period

The Floating Rate Savings Bonds have a lock-In period of 7 years. The investment amount, along with the interest rate of the last six months, will be paid out at the end of 7 years from the date of your subscription. Further, there is no option to redeem it pre-maturely. However, there are a few exit options available for senior citizens (60 Years or above). For example, a senior citizen who is 60-70 years old, will be eligible to redeem it pre-maturely after the completion of 6 years. Similarly, a senior citizen who is 70-80 years old can redeem it pre-maturely after the end of 5 years. Further, a senior citizen who is 80 years or above age can redeem it after completion of 4 years.

However, in the case of pre-mature withdrawal, 50% interest due, and payable for the last six months of the holding period will be recovered. Further, the pre-mature encashment will be available on two days only. That is 1st January and 1st July.

Tradability

You cannot trade it in the secondary market (stock exchanges) like other bonds. The bonds will be held in a Bond Ledger Account (BLA) of the investor. There is no option to store it in your DEMAT account. For your kind information, it becomes easy for an investor to exit or sell the bonds in stock exchanges if held in DEMAT form. Thus, the secondary market provides an option to bondholders to sell their bonds pre-maturely. But, this option is not available in this Floating Rate Savings Bonds.

Transferability 

It is held in the Bond Ledger Account of the investor. Therefore, it is not transferable. You cannot transfer the ownership of these bonds. However, in case of the death of the bondholder, it is transferred to the nominee or the legal heir.

Let’s compare Floating Rate Savings Bonds with other products

FRSB 2020 (T)FIXED DEPOSITPOSTAL NSC
Interest Rate7.15% 5.70% (SBI)6.80%
Floating RateYesNoNo
Interest PayableHalf-yearlyMonthly, Quaterly, Half-yearly, Annually, CumulativePayable at Maturity
Tax on Interest IncomeTaxableTaxableTaxable
TDS YesYesNo
80C BenefitNoNoYes
Minimum Investment (Rs)100010001000
SafetySafeSafe Safe
LoanNoYesYes
Maturity Period7 Years7 days to 10 years5 years
Premature Withdrawl No YesOn Special Conditions
A comparison Table: Table No 1

Analysis

Interest Rate

The current interest rate is 7.15% for FRSB 2020. However, it is not fixed and changes with the interest rate of NSC (National Savings Certificate). The government of India revises the interest rate of small savings schemes quarterly. You can visit the Department of Economic Affairs website to view the latest interest rates of various small saving schemes. The bank fixed deposits come with a variety of terms and plans. Some renowned banks provide you a lower interest rate, but small banks like IDFC FIRST bank offer you a higher interest rate on their Fixed Deposits. I have mentioned the interest rate of the State Bank of India as an example only. However, a higher interest rate comes with a higher percentage of risk. In the NSC case, the current interest rate is 6.8% and will remain fixed throughout your term.

FRSB comes with a floating interest rate. The floating rate has both merits and demerits. Today, Corona Virus has engulfed the whole world. The economy has come to a standstill across the globe, including India. The government of India wants to push up the economy. In such a scenario, we cannot expect an upward trajectory of interest rates. It can go up after a few years, but not right now. However, in other cases, like bank fixed deposits or NSC, you lock the interest rates for a particular term.

Interest Payout

The FRSB will give you an interest in half-yearly. Thus, if you are a retiree and need a monthly payout option, it is not for you. You can opt for PMVVY (Pradhan Mantri Vaya Vandana Yojana) or SCSS (Senior Citizen Savings Scheme). Further, SCSS gives you interest quarterly. If you don’t want an interest payout option instead would like a cumulative one that pays interest at the end of the term, then also this bond is not suitable for you.

Taxability

When it comes to tax, there are a lot of products available that are tax-friendly. You can claim deductions up to Rs 1,50,000 under section 80/c. However, under the New Tax System, the amount will be taxable at maturity. You have to add the amount under ‘Income from other sources’ during tax returns. FRSB does not come with such tax privileges, and the bank will also deduct TDS on your interest income. However, you can submit Form 15G/15H on time to avoid TDS.

Pre-mature Withdrawl

Sometimes, you need money before it matures. In such cases, it becomes easy if the investment option provides such type of facility. However, you will not get any pre-mature facility under FRSB. Only senior citizens can withdraw it prematurely after a certain period that I have already mentioned before. Further, you cannot sell it in the secondary market, as it is not held in the DEMAT form, and it is the most significant disadvantage of this bond. In bank FDs, you have to pay the penalty to close the account prematurely. Similarly, you are allowed to settle NSC prematurely on two conditions, i.e., death of account holder or when ordered by a court.

Final Thought on FRSB 2020

In my opinion, it is a better option than a bank FD if you don’t need the money in the next seven years. Its interest rate may go down somewhat, but I don’t think it can touch a 5.7% rate in a short period. Further, if you are not comfortable with a half-yearly interest rate payout option, you can deposit the same interest amount in FRSB or other products. Thus, you will get some extra benefits. Further, it is one of the safe and secure options backed by the Central Government of India. Therefore, it is up to you to decide whether you want to invest in this product.

Let me know if you have any doubts about the product. If you enjoyed the post, don’t forget to share it with others.

Thanks and regards.

finguru@finlessons.com

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