A bond is a debt instrument with a fixed maturity term and defined interest rates. A government entity or business can issue it to raise funds from the market for specific purposes. Government bonds are issued majorly for social welfare and economic development. The bondholder lends money to the bond issuer. Until the maturity period, the invested amount stays with the issuer. In return, the issuer assures investors regular interest at fixed intervals, and the principal is repaid to the investors on the maturity date. Interest rates are reviewed and reset every six months in a financial year.
Highly Safe Bonds
Bonds are safe and secure fixed-term instruments, and an investor can find several types of bonds as an investment option. Among different types of bonds, RBI Bonds, another name as Government of India Savings (Taxable) Bonds, are considered highly safe bonds in India.
RBI Bonds or Government of India Savings (Taxable) Bonds are risk-free investments with a high-interest rate and regular income with half-yearly interest payouts. There is no option for interest accumulation to be paid on maturity. These bonds are issued with a longer maturity period and are not transferable. The minimum investment amount is quite low for these bonds. The interest on these RBI Bonds is taxable in the hands of investors. RBI bonds subscription remains open for investors for a specific period. Investors can buy these bonds until the subscription period ends. A premature redemption facility is available to eligible investors.
Salient Features of RBI Bonds
Following are the features of RBI Floating Rate Savings Bonds (Taxable):
As the issuer is the Indian government itself, RBI bonds are considered an absolutely safe investment. Risk-averse investors can get assurance of the safety of their invested funds and interest income.
RBI bonds are issued with a maturity period of seven years from the investment date. An investor with a long horizon can consider these bonds.
Eligibility for Investment
Residents of India are allowed to invest in RBI bonds individually, on a joint basis, on behalf of a minor. A Hindu Undivided Family (HUF) can also invest in these bonds. Non-resident Indians (NRIs) are not permitted to invest in these bonds.
The bonds can not be traded in the secondary market. If you have missed the opportunity to invest in these bonds, you need to wait for the next issue.
RBI bonds are not eligible to collateral against a loan in the repo market.
Interest earned from these bonds is subject to income tax. Tax Deducted at Source (TDS) is levied when interest is paid. If an exemption is available under the Income Tax Act,1961, investors can declare it while applying for the bond.
Reasons why to invest in RBI Bonds
Most Indian investors prefer RBI bonds to include in their investment portfolios. The main reasons for this preference are enumerated below:
High-Interest Rates without Any Risk
A higher interest rate than fixed deposits is one of the primary reasons for investors’ preference to invest in RBI bonds. Investors can earn interest income at a higher rate than fixed deposits without taking a risk on their funds. The recent issue of 2020 is offering interest at 7.15%. It is a 100% risk-free investment with the government-back. The interest rate of these bonds is linked to the NSC (National Savings Certificate). These RBI Bonds always pay 0.35% higher than the NSC rate.
Another supportive reason is premature withdrawal. Senior citizens are allowed to withdraw their funds prematurely. Investors aged 60 – 70 years can withdraw the bond after completing six years. Investors aged 70 – 80 years can withdraw after five years. Senior citizens above 80 years can withdraw the bond after completing four years.
- There is no maximum limit to investing in RBI bonds. An investor can invest as low as Rs.1000 in these bonds. Investors can invest in multiples of Rs.1000 without any limitation to maximum cap.
- RBI bonds are issued electronically to be held in the Bond Ledger Account. The account is set in the name of the investor to hold the bonds safely. A Nationalized bank or a receiving office opens this account and issues the bond holding certificate to the investor electronically within seven days from the date of application.
- Investors have the nomination facility also to utilize. An individual bondholder can make a nomination.
- Investors receive the prompt payment of half-yearly interest payouts/maturity value directly to their registered bank account.
Easily meet your financial objectives
Once you have invested your funds in the RBI bonds, you have saved for seven years to fulfil your long-term goals. Your funds are absolutely safe, and at maturity, you will be able to utilise these funds to timely accomplish your objective. You receive interest on these bonds every six months a year on a semi-annual basis, generally, on 1st July and 1st January, which helps to meet your small expenses.
- RBI bond investing is an attractive offer for individuals who fall in the lower income tax bracket due to the taxability feature.
- Investors looking for a highly safe investment with a guaranteed income can invest in these bonds, considering their liquidity needs.
- Senior Citizens with surplus money beyond their emergency financial needs and want regular payouts at a higher interest rate can invest in these bonds.
Thus, RBI bonds offer guaranteed interest and complete capital protection that allures most individual investors.