On July 1, 2020, the RBI introduced the Floating Rate Savings Bond (taxable), with an interest rate of 7.15%. The interest rate bonds are reset every six months, on July 1 and January 1 of each year. However, nothing has altered since its inception. What exactly is a floating rate savings bond, and who should buy one? This essay will provide you with a thorough understanding of this financial product.
What is a Taxable Floating Rate Savings Bond?
A floating rate savings bond (taxable) is a government of India debt product. It is a floating rate instrument, which implies that the interest rate or coupon rate is not fixed and will change over time. A benchmark rate governs how interest rates change under the supervision of the RBI. The minimum investment in this instrument is Rs. 1000, with no maximum restriction. It pays interest every six months. It was first introduced on July 1, 2020.
Because it is a government bond, this transaction has little risk involved. These bonds have a seven-year maturity. However, a specific provision for senior folks allows them to redeem the bond before it matures.
What Are The Requirements For Investing in a Floating-Rate Savings Bond?
According to RBI standards, the following are the qualifying criteria for investing in these bonds:
- The investor does not have to be a resident of India.
- In his or her capacity, or jointly, or based on either-or survivor, or behalf of a minor as a father/mother/legal guardian
- An Undivided Hindu Family (HUF).
Features of The 2020 Floating Rate Saving Bond (Taxable)
- The interest rate on these bonds changes every six months in accordance with the benchmark rate. The interest rate may also remain unchanged if the benchmark rate remains unchanged. However, the RBI is required to declare the interest rate for the next six months every six months. For example, the RBI just published the coupon rate for July 2021 to December 2021.
- The interest rate on the National savings certificate serves as the benchmark rate. The current NSC interest rate is 6.8%. As a result, the interest rate on a floating rate savings bond is 6.8%+.35% = 7.15%. It has stayed the same because the NSC interest rate has stayed the same for the July and September quarters.
- The contract has a seven-year lock-in duration. Senior citizens can redeem it after six years under a specific condition, while super senior citizens can redeem it after five years. These are tax-exempt bonds. Interest earned on these bonds is taxed. The interest amount will be applied to your taxable income and taxed according to your tax bracket.
- These bonds can be transferred to the nominee but not exchanged. When the bondholder dies, the bond is automatically transferred to the nominee.
Investment Goals And Hazards
To offer savers a guaranteed rate of interest throughout the medium term. Floating-rate bond investors are only partially protected from inflation.
Alternatives And Suitability
- Suitable for conservative investors looking for guaranteed profits on a one-time investment.
- Not suitable for investors willing to take some risk in exchange for higher returns from equity-linked investments.
- Alternatives include balanced mutual funds (for those willing to take on risk), (ii) bank fixed deposits (with a lower rate of return), and (iii) company deposits.
Capital And Inflation Safeguards
Your investment in floating-rate bonds is entirely safe. However, there is no inflation protection. Thus, the deposit receives no actual profits anytime inflation exceeds the current interest rate. When inflation is lower than the current interest rate, it is possible to achieve a positive real rate of return.
Guarantees
The current interest rate on floating-rate bonds is 7.15% (subject to semi-annual reset) for a seven-year term.
Liquidity
These bonds are not listed or traded. Therefore they cannot be used to secure loans. You are effectively locked in for a seven-year contract. Premature encashment is permitted with a penalty for elderly citizens after a minimum lock-in time that ranges from four to six years according to the senior citizen’s age category.
The lock-in period is six years for someone between the ages of 60 and 70. It is five years if the investor is between the ages of 70 and 80, and four years if he is over the age of 80.
Option to Exit
You can only get out of floating-rate bonds after they mature after seven years.
Tax Consequences
These bonds’ interest is wholly taxed. The principal investment is not deductible.
Where to Purchase
They can be acquired at SBI branches, other nationalised banks, and any other banks designated by the RBI.
Who Should Invest in The 2020 Floating Rate Saving Bond (Taxable)?
Persons in lower tax brackets can invest in these bonds. The rationale is that the bond has a taxable characteristic. As a result, if you are at a higher tax rate, the tax payable will climb even more due to the interest earned. Furthermore, the bond’s interest earnings will be reduced due to the tax. For example, if you are in the 30% tax band, the 7.15% interest rate becomes 4.5% for you.
At the same time, investors who have retired and desire a consistent source of income to support their lifestyle are perfect candidates.
The Benefits of a Floating Rate Saving Bond (Taxable)
The Benefits of Floating Rate Bonds include the following:
- Because these are government bonds, which are risk-free debt instruments, there is no credit risk. You do not have to be concerned about late payment of interest or principal at maturity.
- Floating-rate savings bonds pay a greater interest rate than regular recurring deposits and time deposits. At the same time, the current interest rate on a 5-year time deposit offered by the State Bank of India to the general public is 5.4%.
Conclusion
Government bonds are an excellent way to lower your risk exposure in your portfolio. These bonds have a lower credit risk and are guaranteed by the government. Floating-rate savings bonds provide investors with an option to park their money away from market volatility at a time when they are looking for safe investment avenues. People seeking risk-free investing options may invest in floating-rate saving bonds. These bonds pay a significantly higher coupon, which varies every six months, dependent on the NSC’s interest rate. These can be excellent investments if you are in a lower tax bracket or have retired.
There are different types of investment options in India for NRIs; risk, reward and return vary from one another. Because of confusion and additional regulations for NRIs and OCIs, NRIs living away from India may face several challenges. At SBNRI, we understand this struggle. You can download SBNRI App to get assistance with investment for a smooth procedure.
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Financial organisations, corporations, and governments issue floating rate bonds to borrow money from the public. Unlike traditional regular bonds, which have a fixed interest rate, floating rate bonds have an interest rate that is related to a preset benchmark rate and is adjusted on a regular basis.
Floating-rate bonds can shield investors against inflation. Although not perfect hedges, floating-rate bonds shield investors against inflation. Floating-rate bonds are securities whose interest rates fluctuate in response to a rate to which they are linked.
When interest rates rise, floating rate funds appeal to investors because they pay a higher level of interest or coupon payments. Floating rate funds are an appealing investment for any portfolio’s fixed income or conservative portion.
These bonds’ interest is completely taxed. The principal investment is not deductible. They can be acquired at SBI branches, other nationalised banks, and any other banks designated by the RBI.
