Govt. of India bonds for absolute safety

They suit investors in the 10-20 per cent tax bracket who are ready for six-year lock-in

Recent credit rating downgrades of corporate bonds have rattled retail investors.

If you are looking for absolute safety and reasonable returns, you could consider investing in the ‘Govt. of India 8% Savings (Taxable) Bonds – 2003’ issued by the Reserve Bank of India (RBI).

Given the present scenario of low interest rates, the interest rate of 8 per cent (taxable) offered by these bonds seems attractive. Other products issued by the government for almost similar tenure include NSC, KVP and Post Office 5-year time deposits. The interest rates on these schemes are below 8 per cent currently.

Conservative investors in the 10 and 20 per cent tax bracket who are ready to lock-in for a six-year period could invest in these bonds.

Features

The 8% Savings (Taxable) Bonds – 2003 is one of the safest investment options as it is issued by the RBI on behalf of the Indian government. These bonds are available for retail investors on tap. That means an investor can buy them as and when required.

These bonds are available with the face value of ₹1,000 with maturity of six years. The minimum investment is ₹1,000 and in multiples thereof. There is no maximum limit.

Individuals,HUF, University and Charitable institutions can invest in these bonds. However, non-resident Indians (NRI) are not eligible to invest in these bonds.

Investors are offered with two options — cumulative and non-cumulative. Under cumulative option, the investor can receive the amount only at the time of maturity.

For the investment of ₹1,000 in each bond, one can get ₹1,601 (principal and accumulated interest that is compounded on a half-yearly basis) at the end of the sixth year.

Under non-cumulative option, the investor receives interest once in six months i.e on August 1 and February 1 of every year.

Interest income is taxable as per the investor’s income tax slab rate. TDS is deducted if the interest exceeds ₹10,000 in a financial year.

They are not eligible u/s 80C.

Interest rate of 8 per cent has remained fixed since 2003. The RBI has the freedom to change the rate at any point in time.

These bonds are not tradable in the secondary market and not transferable. Nomination facility is available. These bonds are eligible as a collateral for loans from banks.

No roll-over or reinvesting facility is offered post maturity.

Premature withdrawal

Only investors who are above 60 years are eligible for premature withdrawal.

Even this comes with certain conditions. Investors in the 60-70 years age group can withdraw after five years while those in the 70-80 years bracket can withdraw after four years.

Likewise, investors who are above 80 can withdraw after three years from the date of issue. However, penalty of ₹20-30 per bond will be charged from the investor for premature encashment.

How to buy

You can buy these bonds from banks and Stock Holding Corporation. Currently, there is no facility to buy these bonds online.

All the documentation has to be done through physical mode only.

Broking houses such as HDFC securities facilitates their customers to get it done through the physical mode.

It is mandatory for investors to provide bank account details to facilitate payment of interest/maturity value through electronic mode. You have to enclose a copy of PAN card, address proof (Aadhaar card) and a cancelled cheque along with the application form.

The mode of investment can be cash, cheque or DD. The bond certificate will be issued by the bank in which you invest, on behalf of the RBI.

Caveat

One must remember the opportunity cost of locking in for six years now for an 8 per cent return.

Interest rates have bottomed out and are expected to move up sooner than later.

So an investment for a one to two-year period now will give investors an opportunity to reinvest at a higher rate, when the rate cycle moves up.

Nevertheless, considering that these bonds enjoy sovereign guarantee and are absolutely safe to invest in, investors can park a portion of their surplus in these bonds.

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