Understanding Floating Rate Savings Bonds, 2020 (Taxable)
(This
is for information purposes only. This should not be construed as a
recommendation or investment advice even though the author is a CFA Charterholder. Please consult your financial
adviser before taking any investment decision. Safe to assume the author has a vested
interest in stocks / investments discussed if any.)
(updates 03Jan2024, 09Nov2023, 28Oct2023 and 27Jul2023 are available at the end of the blog)
(Floating Rate Savings Bonds, 2020 Taxable are not to be confused with Floating Rate Bonds or FRBs)
Government of India introduced Floating Rate Savings Bonds, 2020 (Taxable), or FRSB 2020 (T) for short, with effect from 01Jul2020. These bonds are issued by Reserve Bank of India, India's central bank, on behalf of the Government of India.
Salient Features of the bonds are:
The coupon / interest rates of these bonds are reset every half-year on January 1st and July 1st of every year. For example, as on 01Jan2023, the interest rate on 5-year National Savings Certificate (NSC) issued by Post Office is 7.00 percent.
Hence, the coupon rate
on FRSB, 2020 bonds is set at 7.35 percent (7.00 + 0.35) for the
half-yearly period, from 01Jan2023 to 30Jun2023, and the interest is
payable on 01Jul2023 (full details in table 2 below).
Background
Prior
to the introduction of FRSB 2020 (T), investors used to have the option
of investing in fixed rate bonds, called 7.75% Savings Bonds (Taxable),
2018. These fixed rate bonds were abruptly withdrawn by Government of
India effective 28May2020.
After withdrawing the above fixed rate 7.75% bonds, the Government of India introduced FRSB bonds effective 01Jul2020. The idea was Gov't of India did not want to pay fixed rate (which was higher at that time compared to market rates) and wanted to switch to floating rates, pegging them to market rates -- which were considerably lower in Jun2020.
This is a good thing as the FRSB bonds are supposed to be market-determined, provided the underlying NSC rate is changed as per market rates. As we've seen in the past, Government of India changes the Post Office savings rates capriciously and arbitrarily.
As such, the coupon rate on these FRSB 2020 (T) bonds is not market determined.
Coupon Rates since 01Jul2020 >
Suitability
As the interest income from the FRSB 2020 (T) bonds is fully taxable at the tax slab of the eligible investors (see table 1 above), these bonds may be suitable only to a limited set of individuals and others, who are high net worth individuals (HNIs) with investable assets above Rs 8 crore roughly.
Moreover, tax is deducted at source (TDS) on the half-yearly interest rate paid on these bonds on January 1st and July 1st of every year.
Investors have to consider the following factors before making any investment in these bonds:
1) better to consult your financial adviser before making any decision
2) investment goals -- whether you need regular income (the interest is paid half yearly, there is no cumulative option) and are these bonds in line with your investment needs
3) safety - these are issued by Government of India and as such they are 100 percent safe -- unless the government defaults which is very remote
4) convenience - these bonds are issued electronically; and are held by RBI in your Bond Ledger Account (BLA) -- you need to consider whether it is convenient for you to hold them in this form
5) taxability - you need to see whether the provisions of TDS and fully taxable nature of the bonds are in line with your tax options
6) tenure / liquidity -- the bonds will mature after seven years; you have to decide whether you're comfortable with locking * your funds for seven years; the bonds are not transferable and there is no secondary market for the bonds to sell them before maturity date.
(* the facility of premature encashment of bonds is available to the
eligible investors after lock in period of 4, 5, and 6 years in the age
bracket of 80 years and above, between 70 to 80 years and 60 to 70 years
respectively -- of course, investors have to pay penalty charges for premature withdrawal)
7) rate of interest - is the rate of interest offered by the bonds attractive and are there any better alternatives suitable to your investment goals and objectives?
- - -
P.S.: After writing the blog, the following updates are added with new information / images:
Update 03Jan2024: On 01Jan2024, RBI announced interest at 8.05 percent (remains unchanged from the previous half-year) for the half-yearly period from 01Jan2024 to 30Jun2024 on FRSB, 2020 (Taxable) >
Update 09Nov2023: Interest rates on FRSB 2020 (Taxable) are reset every half year and are linked to prevailing 5-year NSC interest rates. So, interest rates on FRSB can be quite volatile at times as happened during 1999 to 2003 period.
Interest rates on NSC fell from 12 percent in 1999 to 8 percent by 2003, as finance ministers Jaswant Singh and Yashwant Sinha, under Vajpayee government, dramatically reduced interest rates across the broad in the Indian economy (leading to economic revival after 2003).
Data from RBI's Handbook of Statistics on Indian Economy (HBIE) >
Update 28Oct2023: On 23Oct2023, RBI issued a press release allowing retail public to invest in FRSB, 2020 (Taxable) via RBI Retail Direct Portal. Currently, retail investors can invest in Central Government Securities, Treasury Bills, State Government Securities and Sovereign Gold Bonds via Retail Direct Portal.
Now, the RBI Retail Direct Portal is broadened to FRSB or Floating Rate Savings Bonds, 2020 (Taxable) also.
RBI on 12Nov2021 announced activation of RBI Retail Direct Scheme. This was done to widen the reach of government securities (G-Secs) and other securities (like, Treasury Bills and state gov't bonds) to the retail public directly via Retail Direct Portal.
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References:
RBI press release 23Oct2023 - FRSB via RBI Retail Direct Portal
RBI FAQs on FRSB
RBI circular on FRSB dt 26Jun2020
RBI circular on features of FRSB 26Jun2020
RBI circular on FRSB operational guidelines 30Jun2020
Govt of India Notification on FRSB 26Jun2020
Govt of India Notification on sale of G-Secs 27Mar2018
Tweet 27Jun2020 on withdrawing 7.75% GOI Savings Bonds
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Disclosure: I've vested interested in Indian stocks and other investments. It's safe to assume I've interest in the financial instruments / products discussed, if any.
Disclaimer: The analysis and opinion provided here are only for information purposes and should not be construed as investment advice. Investors should consult their own financial advisers before making any investments. The author is a CFA Charterholder with a vested interest in financial markets.
CFA Charter credentials - CFA Member Profile
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He blogs at:
https://ramakrishnavadlamudi.blogspot.com/
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