The Floating Rate Savings Bonds, 2020 taxable scheme (FRSB) was recently declared by the Government of India vide its declaration on 26th June 2020 and these bonds substituted 7.75 per cent of the taxable savings bonds which have been discontinued since 28 May 2020. From July 1, the FRSB with a term of seven years was accessible for a subscription. Although it has preserved much of its counterpart's attributes, there are a few essential adjustments as well. During the falling rate context and rising corporate bond declines, let us attempt to simplify these bonds and consider their traits.
An Indian resident, a minor and a HUF except NRI in his or her absolute discretion can invest in the scheme, either individually or jointly. In compliance with the rules of the Government Securities Act, 2006 both nomination and its cancellation facility is available.
Seven years will be the maturity period of these bonds without an exit option and even liquidity for the general public. Premature withdrawal, however, is permitted in particular situations for senior citizens. Elderly people between the ages of 60 and 70 can prematurely close the bond after six years of execution; senior citizens between the ages of 70 and 80 can prematurely close the bond after five years of completion and after 4 years of completion senior citizens over the age of 80 can request for the same.
Minimum and maximum investment limit
Although the minimum contribution is Rs 1,000 and in multiples of Rs 1,000, there is no maximum cap for investment in bonds.
If compared to its precedent which had a 7.75 percent fixed interest rate, the current floating rate savings bonds similar to the National Savings Certificates (NSCs) will bear 35 basis points higher returns compared to NSCs. This indicates that in accordance with interest rates on NSCs, interest rates on bonds will also fluctuate. As the current returns on a five-year NSC is 6.80 percent, the bond's face value or par value and not on the issue price or market value for January 2021 will be 7.15 percent for the first coupon span. Interest under these bonds will be payable on January 1 and July 1 per year on a half-yearly basis without any cumulative option. Interest on the bonds, though is taxable can be counted as a part of your income or other income and thus taxed according to your tax bracket. The current floating rate bonds are much stronger and deliver a higher interest rate of 7.15 percent relative to the 5.50 percent interest rate is what is currently delivered by fixed deposits of similar maturity period of large public and private sector banks.
How to invest?
At all branches of the largest commercial giant State Bank of India, public sector banks and private sector banks such as Axis Bank, HDFC Bank, ICICI Bank and IDBI Bank you can submit the application form to the receiving offices along with the required KYC documents. Through cash (up to Rs 20,000 only)/drafts/cheques or any online mode such as NEFT or RTGS, individuals can subscribe and contribute to the bonds. Remember that the bonds will be provided in digital form only and maintained at the purchaser's credit in an account operated with the Receiving Office called the Bond Ledger Account. Although the bonds are retained to the credit of the investor's Bond Ledger Account they can only be transferred in case of death of the holder on behalf of a nominee(s)/legal heir respectively.
Inflation may increase in the coming months with the government introducing capital into the economy via stimulus initiatives and hence if the interest rates were increased you will get higher potential returns on floating rate bonds too. And there will be no risk of default because it has the government's sovereign pledge and it will be a big advantage for an investor who is still worried by a string of failures by corporate bond lenders. In lieu of stability, it will be best to abandon liquidity.