Should Senior Citizens Bet On This Fixed Income Instrument With ROI Of 7.15%?

Key takeaways of floating rate savings bonds

• In these bonds, resident individuals and Hindu Undivided Families (HUFs) can invest.
• One can make a minimum contribution of Rs 1000 with no upper limit towards these bonds.
• There is a set term of seven years on the bonds. For individual investors over 60 years of age, early withdrawals are permitted, subject to a certain lock-in period based on the age of the individual.
• The interest rate is paid out semi-annually per year on 1 January and 1 July which means that these bonds do not provide cumulative interest payment at the end of the maturity period.
• The interest rate on these bonds is updated every six months, i.e. every year on January 1 and July 1.
• Interest earned from these bonds is taxed in compliance with the income tax slab that relates to your income. In addition, TDS on interest income will be deducted.  

How to invest?

Depositing in these bonds will be permissible to the Receiving Office in the form of cash up to Rs 20,000 through drafts/cheques or other electronic processes. In the specified branches of some nationalized banks such as SBI, IDBI Bank, Axis Bank, HDFC Bank and ICICI Bank, approvals for bonds in the form of a Bond Ledger Account will be provided. These bonds will be provided in digital form only and kept in the account called the Bond Ledger Account maintained with the Receiving Office at the credit of the individual.

Should senior citizens invest in these bonds?

There is no collateral risk as this bond is issued by the government of India. The rate of interest will not be set, it will vary as the name suggests. The interest due on 1 January and 1 July will be related to the prevailing rate of interest of the National Saving Certificate (NSC). As of today, the interest rate payable with NSC is 6.8 per cent and until July 1, 2021 the bondholders will get a rate of 7.15 per cent returns. Investors between the age group of 60 and 70 can, pursuant to conditions, can make a premature withdrawal from these bonds after the end of six years from the date of issuance. Investors under 70 and 80 years of age can do so at the end of five years, whereas holders over 80 years of age are allowed after a lock-in period of four years respectively. There is no monthly interest payout alternative on these bonds which may make a serious concern for regular income earners such as senior citizens. As the returns from these bonds are floating rate based, the Post Office Monthly Income Scheme (MIS) with an interest rate of 6.6%, the Senior Citizen Saving Scheme (SCSS) with an interest rate of 7.4% and the Pradhan Mantri Vaya Vandana Yojana (PMVVY) with an interest rate of 7.4% can be closely compared or considered here. Senior citizens searching for regular income should consider SCSS and PMVVY first. Note, the interest rate of floating-rate bonds are linked to the performance of the debt market. But if we look at the current interest rates of 5-year senior citizen fixed deposits which are kept at between 6.2% to 6.3% by the leading banks of India, the ROI of RBI Floating Rate Savings Bonds are much higher. As per your income-tax slab, interest income from these bonds will be taxed. For non-senior citizens in the low tax slab category, this fixed-income instrument can be a good bet. Investors who want reasonable returns with a low-risk appetite can consider these bonds. However, in current unpredictable times, the stability and return of capital at maturity are what investors must look at first.