All you need to know about Floating Rate Savings Bonds

The government of India recently announced the Floating Rate Savings Bonds, 2020 (Taxable) scheme (FRSB) vide its notification dated June 26, 2020. These Bonds have replaced the 7.75% taxable savings bonds, which have since been withdrawn from May 28.

The FRSB having a tenure of seven years opened for subscription from July 1. While it has retained many of the features of its predecessor, there are a few significant changes. In a falling rate scenario and with defaults of corporate bonds increasing let us try to demystify these bonds and understand their features.

Who is eligible to invest?

Any resident Indian in his individual capacity either singly or jointly, a minor and a HUF can invest in the scheme. However, a NRI cannot invest in the scheme.

Where and how to invest?

Application forms can be submitted at all branches of State Bank of India, 11 public sector Banks and four private sector banks viz, Axis bank, HDFC Bank, ICICI Bank and IDBI Bank (called receiving offices). Individuals can subscribe to the bonds by cash (up to Rs 20,000 only)/drafts/cheques or any electronic mode like NEFT or RTGS. Do also note that the Bonds will be issued only in the electronic form and held at the credit of the holder in an account called Bond Ledger Account (BLA) opened with the Receiving Office. Since the Bonds are held to the credit of Bond Ledger Account (BLA) of an investor, they are not transferable, except transfer
to a nominee(s)/legal heir in case of death of the holder of the bonds.

Is Nomination facility available?

Nomination and its cancellation will be in accordance with the provisions of the Government Securities Act, 2006

What will be the tenure of the Bonds?

The tenure of these bonds will be seven years. Therefore, in that sense, they do not have liquidity or an exit option for an ordinary individual. However, early redemption is allowed for senior citizens in special cases. Senior citizens between the age of 60 and 70 can close the bond prematurely after completion of six years; those in the age bracket of 70 to 80 can close the bonds prematurely after completing five years, and for super senior citizens above 80 years they can do so after four years.

How much can you invest?

While minimum investment is Rs 1,000 and in multiples of Rs 1,000 thereof, there is no maximum limit for investment in the bonds.

What will be the Interest rates?

Unlike its predecessor which had a fixed rate of interest of 7.75 %, the new bonds will have a floating rate of interest pegged to the National savings Certificates (NSCs) and will be 35 basis points more than the interest payable on NSCs. This means that interest rates may go up or down in line with interest rates on NSCs. Since the current rate of interest on a five year NSC is 6.80%, the coupon rate for the first coupon period on January 2021 will be 7.15%. The interest on the bonds will be payable at half yearly intervals on Jan 1st and July 1st every year. The erstwhile 7.75 % Bonds had the cumulative option, which is not available in the new Bonds. However, interest on the Bonds is taxable and will be added to your income and taxed as per your tax slab.

The new floating rate bonds are far better and offer a higher interest rate of 7.15% when compared with the interest rate of 5.50% offered by fixed deposits of major public and private sector banks of a similar tenure. For senior citizens, Senior Citizen Savings scheme and Vaya Vandana Yojana offer a higher interest rate.

For them, the new Bonds will still be a good bet if they have exhausted the Rs 15 lakh limit
in each of the schemes. With the government injecting money into the economy through stimulus packages to combat the coronavirus, inflation may go up in the coming months. If interest rates were to go up, the floating rate bonds will fetch a higher rate of interest.

The redeeming feature of the bonds is that since it has the sovereign guarantee of the government there will not be any default risk and that will be a huge bonus for an investor already rattled by a series of defaults by issuers of corporate Bonds. It is better to forgo liquidity in favour of safety.

(The writer is a CFA and a former banker and currently teaches at Manipal Academy of Banking, Bengaluru)