Unlike earlier bonds, the new bonds will carry a floating interest rate of 7.15 per cent, which will be reset every six months
RBI has announced the issue of floating-rate taxable bonds with a coupon rate of 7.15 per cent, which will be available for subscription from July 1, 2020. Earlier, these bonds were available at a fixed interest rate of 7.75 per cent but got discontinued in late May amid a falling interest rate scenario. Now, they are being re-issued at 7.15 per cent but with a floating-rate clause.
The interest rate of these bonds will now be reset every six months in sync with the returns offered by National Savings Certificate (NSC) plus an additional 0.35 per cent over and above that. NSCs are currently offering 6.80 per cent. So, the coupon rate of these bonds is 7.15 per cent (6.80 + 0.35). Also, the cumulative option is not available this time and the interest would be paid on a half-yearly basis, with the first coupon payment likely to be released on January 1, 2021. The remaining features would be the same. Here is a summary of the key features.
|RBI 7.15% taxable bonds|
|Eligibility||Open to investment by individuals and HUFs|
|Interest rate||7.15 % p.a. to be paid semi-annually. The interest rate will be reset every six months|
|Minimum investment||Rs 1,000|
|Maximum investment||No limit|
|Premature withdrawal||Allowed only for Senior Citizens after:
- 6 years if you are in the 60 to 70 years age bracket
- 5 years if you are in the 70 to 80 age bracket
- 4 years if you are above 80 years
|Taxability of returns||Interest is added to the income and taxed as per the applicable slab|
|Tradeability on stock exchange||Not allowed|
A comparison with other alternatives
To understand the viability of these bonds, let us first look at the options that are available to investors. For senior citizens, when we look at other government-backed fixed-income options, we have Senior Citizens Savings Scheme (SCSS) and Pradhan Mantri Vaya Vandana Yojana (PMVVY). Both the schemes are currently offering 7.40 per cent. So, at the moment, these two are offering a higher interest rate.
For other investors, Public Provident Fund (PPF) is a close alternative when it comes to returns, as it is currently offering 7.10 per cent. But it is fundamentally different in its features and utility. It is an accumulation vehicle where you can invest every year and has a maximum investment limit of Rs 1.5 lakh. Also, it does not offer any regular income. So, it is more appropriate for those who are in the accumulation phase.
Debt mutual funds are another alternative. They are capable of delivering higher returns over a longer time frame but their current yields are low, given the low-interest rates. For instance, short-duration funds, which are suitable to make a core holding in a fixed-income portfolio, currently have a YTM of under 6 per cent on average after factoring in expenses. But they have superior liquidity as they do not have any lock-in period and investors can withdraw their money at their discretion.