Personal Finance

Risk-free returns from RBI bonds

Satya Sontanam | Updated on July 14, 2019 Published on July 14, 2019

The investment is absolutely safe and gives good returns

The corporate debt market, lately, gave investors some jitters with delays and defaults in interest payments and principal repayments. If you are looking for a safe haven with reasonable returns, RBI Savings Bonds is among the options you can consider.

These bonds, known as 7.75 per cent savings (taxable) Bonds, 2018 or RBI savings bonds (in general), have a tenure of seven years and come with cumulative and non-cumulative (half-yearly interest payment) options.

The bonds look attractive when compared to many fixed-income options. If you are looking for periodical income, the non-cumulative option with its attractive interest rate, complete safety and half-yearly interest payments is a good choice.

If you are seeking a cumulative investment, these bonds can be considered after you have exhausted your Section 80C investment limit or your income is within the tax-exempt limit of ₹5 lakh.

With half-yearly compounding, the yield on the cumulative bond comes to 7.9 per cent, comparable with the National Savings Certificate (NSC) and the five-year post office deposit, without considering tax breaks. Conservative investors can park a portion of their surplus in the RBI savings bonds.

Decent returns

In the present scenario where repo rate and yield on the 10-year G-Sec are heading downward, the interest rate of 7.75 per cent per annum offered by RBI Savings Bonds seems good.

On fixed deposits (FD) of five-year tenure, while private sector banks offer 7.25-7.5 per cent, public sector banks offer a lower 6.25-6.75 per cent per annum. Though small finance banks offer higher rates of interest, accessibility could be an issue due to their limited presence.

Also, while FDs in banks are insured up to ₹1 lakh for both principal and interest, investment in the RBI bonds are completely guaranteed.

Key features

The RBI savings bonds are one of the safest investment options as they are issued by the RBI on behalf of the Government of India.

Individuals and HUFs (Hindu Undivided Family) are eligible to purchase these bonds with minimum investment of ₹1,000 and with no upper limits. Note that non-resident Indians (NRIs) are not allowed to invest in these bonds, but they can be nominated to receive proceeds in case of death of the primary owner.

The bonds will be issued in the demat form and credited to the bond ledger account (BLA) of the investors. But these bonds are neither tradable in the secondary market nor transferable. They are also not eligible to be used as collateral for getting loans from banks, financial institutions and non-banking financial companies.

While interest on cumulative bonds is paid at the time of maturity along with the principal, interest on non-cumulative bonds will be paid half-yearly on August 1 and February 1 for period ending July 31 and January 31 respectively. Investment in these bonds are not eligible for tax benefit under Section 80C of the Income Tax Act. Interest income, too, is taxable as per the investor’s income tax slab rate. A 10 per cent TDS will be deducted at the time of interest payment if the total interest income in a year exceeds ₹40,000. For senior citizens, the limit is ₹50,000.

You should invest in these bonds only if you can lock-in your investment for seven years. However, for those in 60-70 age bracket, 70-80 years and above 80 years, the lock-in period is six, five and four years respectively. Even so, the penalty for pre-mature withdrawal after the lock-in period is 50 per cent of the interest due and payable for the last six months of the holding period.

You can buy these bonds from the Stock Holding Corporation of India or any of the nationalised banks private sector banks such as ICICI Bank, HDFC and Axis Bank. It can also be bought through demat accounts maintained with your broker.

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