The ultimate aim of investors is to grow their wealth, and the sooner, the better it is. They keep shuffling their money from savings accounts to liquid funds for the sole reason of higher interest rates. For those seeking a guaranteed fixed return, and do not want to take risks, fixed deposits (FDs) are considered to be a safer option, although the interest rates offered by top lenders like the State Bank of India (SBI), HDFC, ICICI, and others are not quite enticing.
The RBI Floating Rate Savings Bonds 2020 (Taxable) is set to offer an interest rate of 8.05%, a significant increase from its current 7.35% rate. This bond’s interest rate is linked to the National Savings Certificate (NSC), which recently saw an increase to 7.7%. According to experts, this is a better rate than several fixed deposit options.
What are Floating Rate Savings Bonds (FRSBs)?
FRSBs are interest-bearing, non-tradeable bonds, issued by the central government, which come with a lock-in period of 7 years. The interest rate of these bonds is not fixed like usual bonds, but is floating in nature. The FRS bonds 2020 were launched on July 1st, 2020
So should FD investors switch to RBI Floating Rate Savings Bonds?
“These bonds offer an attractive option for fixed-income investors, especially in comparison to bank fixed deposits,” Amit Gupta, MD, SAG Infotech
The RBI Floating Rate Savings Bonds and NSC are both backed by the Indian government, ensuring the safety of invested funds.
Fixed Deposit vs RBI Floating Rate Savings Bonds
However, the RBI bonds have a longer lock-in period of seven years, with limited premature withdrawal options for specific age groups. The interest on these bonds is paid semi-annually, providing regular income for investors.
“There is no maximum investment limit for these bonds, and they can be purchased with a minimum subscription of ₹1,000. In contrast, tax-saving fixed deposits have a limit of ₹1.5 lakh,” said Amit Gupta.
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FD vs Floating Rate Savings Bonds: Taxation rules
While the interest earned on these bonds is taxable, there is an income tax deduction of up to ₹1.5 lakh available for NSC and bank fixed deposits, making them eligible for Section 80C exemptions.
RBI Floating Rate Savings Bonds perfect choice for these investors
At present, these RBI Floating Rate Savings Bonds are the perfect choice for people who are looking to save money for a long duration and get a safe and fixed income, said Amit Gupta
However, people should also consider the fact that there are some risks if the interest rates change a lot and stay that way for a long time. The bonds’ higher yield, periodic interest payments, and favorable tax regime make them an attractive choice for many Indian investors, added Gupta
Until recently, these bonds were only accessible at select branches, and other entities designated by the Reserve Bank of India. But now, retail investors can subscribe to these bonds through RBI’s Retail Direct portal, the central bank said in a circular dated 23 October.
Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
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Updated: 03 Nov 2023, 10:24 AM IST