The Government of India has announced the launch of Floating Rate Savings Bonds 2020 (taxable) scheme effective from 01/July and it’s linked with National Savings Certificate. This bond was launched after 7.75 percent taxable savings bonds were withdrawn on 28/May.
Before discussing that let us look at its features first:
– Resident individuals (including joint holdings) and HUF can invest in these bonds, and not NRI.
– Interest is payable semi-annually from the date of issue of bonds, up to 30th June / 31st December as the case may be, and thereafter half-yearly on 1st July and 1st January respectively. There is no option to pay interest on cumulative basis.
– The interest rate will be reset every six months, the first reset is due on January 1, 2021. On 1st January 2021, interest shall be payable at 7.15%.
– The coupon rate will be linked with prevailing National Saving Certificate (NSC) rate with a spread of (+) 35 bps. Current NSC rate is 6.8%.
– The tenure of the bond would be 7 years from the date of issuance. Premature withdrawal is available for investors in the age bracket of >80 years, >70 years and >60 years after lock-in period of 4, 5, and 6 years respectively. Penalty charges would be 50% of last coupon payment.
We have not yet covered this enough. Few more points to consider:
– The minimum amount that you can invest in FRS Bonds is Rs 1,000 and thereafter in multiples of Rs 1,000. There is no maximum limit though.
– Interest received from FRS Bonds will be taxed as per respective income tax slab and TDS will be applicable on the interest income.
– Bond Ledger Account (BLA) will be created with designated branches of nationalized banks or private banks (ICICI, HDFC, IDBI and Axis) to hold FRS Bonds in electronic form.
– The bonds are not eligible for trading in the secondary market and cannot be used as collateral for loans.
You can think of investing into FRS Bonds only if you are ok with its minuses, such as – illiquidity; compulsory interest payout; no monthly payout option and floating nature of interest payouts. This may make sense for retired individuals to consider provided they have checked the cashflow scenario well with other alternatives.