The Reserve Bank of India also called RBI, is India's Central banking institution. It mainly controls the monetary policy of the Indian rupee. It was set up on April 1, 1935, under the Reserve Bank of India Act, 1934.
RBI plays an integral part in the development strategy of the Government of India. It is also known as banker's bank or Mint Street.
Apart from undertaking the consolidated supervision of the financial sector which comprises of commercial banks, financial institutions, and non-banking finance companies, it also offers the variety of bonds to help finance the country's debt.
Recently, RBI issued 7.75% Savings (Taxable) Bonds, 2018 starting from January 10, 2018. It was issued to enable resident citizens or Hindu Undivided Family to invest in a taxable bond, without any monetary ceiling.
What is a Bond?
A bond is a fixed income investment in which an investor loans money to an entity (typically corporate or government organizations) which borrows the funds for a defined period of time at a variable or fixed interest rate. Bonds are used by companies, municipalities, states and sovereign governments to raise money and finance a variety of projects and activities. Owners of bonds are known as debt holders or creditors of the issuer.
Salient Features of 7.75% Savings (Taxable) Bonds
Who can Invest in the Bonds?
These Bonds are open to investment by individuals (including the Joint Holdings) and Hindu Undivided Families.
NRI's are not eligible for making investments in these bonds.
Application for the bonds in the form of bond ledger account can be obtained at the designated branches of the agency banks and Stock Holding Corporation of India Limited (SHCIL) in all numbering about 1600.
• The bonds will be issued at par at Rs 100 percent.
• The bonds will be issued for a minimum amount of Rs 1000 at face value and in multiples thereof.
• The issue price will be Rs 1000 for every Rs 1000 (Nominal).
• Bonds will be issued in demat form (Bond Ledger Account) only.
Bonds will be on tap until further notice and will be issued in cumulative and non-cumulative forms.
Limit of Investment
There is no maximum limit for investment in the bonds.
Under the Income Tax - Interest on the bonds will be taxable under the Income-Tax Act 1961 as applicable according to the relevant tax status of the Bondholder.
Under the Wealth Tax - The Bonds will be exempt from the Wealth-tax under the Wealth-tax Act,1957.
These bonds will have a maturity period of 7 years.
Rate of Interest
The rate of Interest on these bonds is fixed at 7.75% per annum. It is payable on a half-yearly basis. The cumulative value of Rs 1000 at the end of seven years will be Rs 1703.
The bonds are not transferable. It cannot be transferred to the Secondary market.
Bonds cannot be used as collateral for securing loans from the banking institutions, non-banking financial companies or financial institutions.
The sole holder of the bond or a single surviving holder of a bond, being an individual can make a nomination.
Tax Deduction at Source
• The tax will be deducted at source while making payment of interest on the Non-Cumulative Bonds from time to time and credited to Government Account.
• Tax on the interest amount of the maturity value will be deducted at source at the time of the payment of the maturity proceeds on the cumulative bonds, and it will be credited to the government account.
The 7.75% Savings (Taxable) Bonds issued by RBI is a good investment option for the investors in the current scenario where interest rates offered by banks are falling gradually.
These bonds have some drawbacks like not tradable or transferable, tax deducted at source, lock-in period is lengthy. Its better for an investor to evaluate all the options carefully before investing in these bonds.