The government of India will come up with Floating Rate Savings Bonds, 2020 (Taxable) scheme starting July 1, 2020. FRSB 2020 (T) taxable bond with no upper investment limit will be available for investment by both resident Indian as well as HUF.
Further as the name suggest the interest rate on such taxable bonds will continue to vary all through the scheme tenure.
Salient features of the scheme are as below:
1. Eligibility for investment:
Individuals (that include holding in joint account) as well as HUFs can invest in these bonds. But NRI category is not eligible to invest in FRSB 2020 Taxable bond.
One can subscribe to these bonds for a minimum amount of Rs. 1000, while there is no upper ceiling for investment in such bonds; the transaction allowed in cash is only up to Rs. 20000. Other mode of investment can be via cheque, draft or digital mode that are acceptable to the receiving office.
The Bonds will be on tap till further notice and issued in non-cumulative form only.
3. Repayment or tenure:
The tenure of taxable savings bonds will be 7 years from the issuance date. Early redemption will be offered in case of specified senior citizen categories.
4. Who will issue these bonds and how?
Designated branches of SBI, IDBI bank, Axis Bank, HDFC Bank, ICICI Bank, nationalized banks will receive the application for these bonds in the form of Bond ledger account.
FRSB 2020 (T) taxable bonds will be issued in only electronic form and maintained in Bond Ledger Account (BLA) of the bond subscriber that is opened at the receiving office.
5. Interest rate:
These bonds will pay interest semi-annually on January 1 and July 1 every year. Thus for the subscription made now, subscribers will get 7.15% on January 1, 2021. The interest rate will then be reset every 6-months, with first reset date being January 1, 2021. Further, these bonds do not come with cumulative interest payment option.
The coupon rate or interest rate on bonds will be pegged to current National Saving Certificate (NSC) rate with a spread of (+) 35 bps over the respective NSC rate.
6. Taxation treatment:
Interest on the Bonds will be taxable under the Income-tax Act, 1961 as amended from time to time and as applicable according to the relevant tax status of the Bond holder. Also TDS implications will also be there if certificate of exemption is not submitted for not deducting TDS.
There is no provision to transfer such bonds except in the case of death of the bond holder to the nominee or legal heir.
These bonds shall not be traded in the secondary market
9. Financing on such bonds:
These bond cannot be used as collateral for loans from banks, NBFCs etc.
So, after the RBI Bonds have been withdrawn, this is another highly safe investment option with lucrative returns in comparison to bank fixed deposit rates which are trending only lower. Currently a 1-year FD with SBI fetches just 5.1% per annum. Also, investors need to be mindful of their tax slab as also the tenure as the new investment avenue lacks liquidity being non-tradable and non-transferable.