RBI Floating Rate Savings Bond

For senior citizens

RBI launched a floating-rate bond, where the interest (payable) changes during the tenure of the bond. This announcement comes after discontinuing their 7.75% fixed-rate bonds which offered a high-interest rate.

Returns

The rate is fixed as 0.35% above the prevailing National Savings Certificates rate — the current rate is 7.15%

Interest rates are revised every 6 months

Interest is paid out every 6 months and it is not cumulative

Transferability

It’s a 7-year tenure with a 7-year lock-in

Lock-in period is lower for senior citizens (above 60 years)

They are not transferrable or tradable and are not eligible as collateral

They can be used for principal payments (on loans) only in the case of senior citizens

Tax

Taxed as any other fixed deposit — as per the tax slab of the investor

TDS will be deducted at source

Risks

They come with sovereign guarantees — zero credit risk

At a time when an SBI Fixed Deposit yields only 5.4% (for the same tenure), this seems a better option. Tax plays a major spoilsport — if you fall in the 30% (or above) tax bracket, then mutual funds are a better option given favourable taxation.

While there are floating-rate mutual funds with over 90% AAA-rated bonds, this bond will appeal to guarantee seekers, especially senior citizens. It can be considered as an option after they exhaust their 15-lakh limit on Senior Citizens Savings Schemes.

We are not including this as a part of our core asset allocation.

 

 

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