Government announces the launch of seven-year floating-rate savings bonds: Here's all you need to know

Government has announced the launch of seven-year Floating Rate Savings (FRS) Bonds, 2020 (Taxable) scheme commencing from July 1, 2020.

The interest on the bonds is payable semi-annually on January 1 and July 1 every year. The coupon on January 1, 2021, shall be paid at 7.15 per cent. The interest rate for next half-year, which is due on July 1, 2021, will reset every six months.

There is no option to pay interest on a cumulative basis. This means that the interest on the bonds will be credited to the investor's bank account at the same time instead of payable at maturity.

Interest that a person receives from these bonds will be taxed as per the income tax slab that applies to his income. Further, TDS will be applicable on the interest income.

Who can invest in these bonds?

According to an RBI notification, Floating Rate Savings Bonds will enable a person resident in India or Hindu Undivided Family to invest in a taxable bond, without any monetary ceiling. However, non-resident individuals are not allowed to invest in it.

Amount one can invest in this offer?

Investment on the floating rate saving (FRS) bond starts from Rs 1,000 and there is no upper limit ion the kind of investment one can do on these bonds. The investment is made for a tenure of seven years. Premature redemption shall be allowed for specified categories of senior citizens. This is similar to the earlier withdrawn 7.75% RBI Taxable Bonds. Since this bond is issued by the government of India, there is little credit risk.

Where to buy these Bonds?

Bonds can be bought from public sector banks and select private sector banks like HDFC Bank, Axis Bank, IDBI Bank, and ICICI Bank. The bonds will be issued only in electronic form and held at the credit of the holder in an account called Bond Ledger Account, opened with the Receiving Office.

Interest rate on Bonds

The interest rate on the bonds is not a fixed rate but it will be floating. Thus in the case, when there is an increase/ rise in the interest rates than a higher interest rate will be provided to the bondholder and vice versa in the case when there is a reduction in interest rates. The interests are payable on January 1 and July 1 every year and will be linked to the then prevailing rate of interest on National Saving Certificate (NSC). FRS will pay 35 basis points more than the rate offered on NSC.

What the investor should remember?

The bonds are not eligible for trading in the secondary market and cannot be used as collateral for a loan from banks, NBFCs and other financial institutions.

However, certain flexibility has been provided to the senior citizens under which investors in the age bracket of 60 to 70 years can opt for premature encashment of the FRS after completing six years from the date of issue, while the investors aged between 70 to 80 years can do so after completion of 5 years and above them have a lock-in period of four years.