Govt floating bonds to offer better rate than bank FDs

Replacing the 7.75 per cent (taxable) Government of India Savings Bonds, the government has announced the launch of a new series of Floating Rate Savings Bonds, 2020 (taxable) with an interest rate of 7.15 per cent. Experts say these bonds are ideal for those who are not in the highest tax bracket and are looking for supplementary income.

But the stream of income would not be constant as these bonds are on floating rate. The interest rate will be reset every six months as per prevailing interest rates.

The first reset being January 1, 2021. The bonds will have a tenor of seven years and the interest will be taxed at your slab rate.

Says Vidya Bala, cofounder, PrimeInvestor.in, “Since the floating rate will be reset half yearly, there is a risk of not getting a fixed income. However, if the interest rates rise, investors can also enjoy higher returns. The interest rate is higher than bank fixed deposits. Secondly, since it is a sovereign bond, there is no credit risk.”

Anil Rego, CEO of Right Horizons, said, "Bank interest rates and bond yields have fallen sharply in the last few months. The floating rate bond comes at a much higher interest rate than bank fixed deposits and also are safe since issued by the government. Taxa-tion wise, they are taxable based on your income, just like bank fixed deposits."

As per the release, the bonds could be held by a person resident in India or a Hindu undivided family (HUF). The bond will be issued at par at Rs 100 for a minimum amount of Rs 1,000 and in multiples thereof and there is no maximum limit for investment. Subscription to the bonds can be made in cash (up to Rs 20,000), cheques or any electronic mode.

These bonds can be purchased from nationalised banks and specified private sector banks. The new bonds have been brought in place of 7.75 per cent Savings (Taxable) Bonds, 2018, which was withdrawn from the close of banking business on May 28, 2020.

There will be no option to pay interest on cumulative basis, which means that the interest will be payable every six months instead of having an option to receive it at maturity. The bonds will be repaid on the expiry of seven years.

However, premature redemption is allowed for specified categories of senior citizens.