- Date : 03/03/2023
- Read: 5 mins
The Floating Rate Savings Bonds are offered by the RBI. The interest rate is linked to the NSC with a (+) 35 basis points spread. We explore whether it is a good idea to invest in this product in the current rising interest rate scenario.
In 2023, fixed-income products are expected to do well as the interest rates are high. As of 8th February 2023, the RBI increased the repo rate by 25 basis points to 6.50%. The interest rates on fixed-income products like fixed deposits, small savings schemes, floating rate products, NCDs, corporate bonds, etc., are high and may go up further. Fixed-income investors are spoilt for choice. One such product is the Floating Rate Savings Bonds, 2020 (Taxable) issued by the RBI on behalf of the Central Government. In this article, we will understand what are Floating Rate Savings Bonds, their features and benefits, and whether you should invest in them.
What are Floating Rate Savings Bonds, 2020 (Taxable) - FRSB 2020 (T)?
The Floating Rate Savings Bonds, 2020 (Taxable) or the FRSB 2020 (T), as the name suggests, is a floating interest rate product. Normally, fixed-income products, such as bonds, have a coupon rate, which is fixed throughout the tenure of the product. So, it pays a fixed interest rate at a fixed frequency throughout the tenure of the product. However, in the case of a floating interest rate product such as the FRSB 2020 (T), the interest rate is linked or pegged to a benchmark. As and when the interest for the benchmark changes, the interest rate on the floating interest rate product is revised at the set frequency.
The interest rate on the FRSB 2020 (T) is pegged/linked to the interest rate on the National Savings Certificate (NSC) with a spread of (+) 35 basis points. So, the interest rate on FRSB 2020 (T) will be the NSC interest rate + 0.35%.
For example, the government announced the interest rate on the NSC at 7% p.a. for the period 1st January to 31st March 2023. Accordingly, the RBI revised the interest rate on the FRSB 2020 (T) to 7.35% p.a. (7% NSC interest rate + 0.35%) for the period 1st January 2023 to 30th June 2023. Please note that the interest rate on the FRSB 2020 (T) is revised every 6 months.
Also Read: Floating Rate Savings Bond: What Makes Them Attractive For Senior Citizens?
Features and benefits of the FRSB 2020 (T)
The government started issuing the FRSB 2020 (T) through the RBI from 1st July 2020. The features and benefits of these floating rate bonds include:
1) Who can invest in FRSB 2020 (T)?
An individual resident in India or a Hindu Undivided Family (HUF) can invest. An individual can invest on a single or joint basis. NRIs cannot invest in these bonds.
2) What is the minimum and maximum investment amount for FRSB 2020 (T)?
An individual can start investing with a minimum of Rs. 1,000 and in multiples thereof. There is no maximum limit on the amount that you can invest. The bonds are issued in electronic format. A Bond Ledger Account (BLA) is opened for the investor, and the bonds are credited to it. The investor is issued a certificate of holding as proof of subscription.
3) Where can the FRSB 2020 (T) bonds be applied for?
You can make an application at the branches of nationalised banks and 4 private sector banks.
Table: Branches where the FRSB 2020 (T) can be applied for
(Source: https://rbidocs.rbi.org.in/rdocs/content/pdfs/GOI26062020.pdf)
4) What is the tenure for FRSB 2020 (T)?
The tenure of the bonds is for 7 years. Premature encashment of bonds is allowed for individuals above 60 years only, subject to a minimum lock-in period, penalty, and other specified terms.
5) What is the interest applicable for FRSB 2020 (T)?
As it is a floating interest rate product, the interest is reset half-yearly. The interest rate is reset on the 1st of January and the 1st of July, every year. The interest rate is pegged/linked to the National Saving Certificate (NSC) interest rate. It has a spread of (+) 35 basis points over the prevailing NSC interest rate. As and when the NSC interest rates are revised, the interest rate on the FRSB 2020 (T) is reset on the 1st of January and the 1st of July.
The interest amount is payable to the investor at half-yearly intervals. The half-yearly interest up to 30th June is payable on 1st July, and the half-yearly interest up to 31st December is payable on 1st January. There is no option to pay the interest on a cumulative basis.
The interest is electronically credited to the investor’s bank account.
Also Read: How To Manage Your Investments During A Rising Rate Cycle
6) Taxation on FRSB 2020 (T)
The interest earned on the bonds is fully taxable. It is added to the bondholder’s overall income and taxed at the slab rate.
7) Trading of bonds
The bonds are not tradable in the secondary market. Also, you cannot avail of a loan from any bank, NBFC, or financial institution by offering the bonds as collateral.
8) Nomination
You can make a nomination (Form C) or cancel (Form D) it in the prescribed form.
9) Transferability
The bonds are not transferable. The only exception is the transfer to the nominee or legal heir in the event of the investor’s death.
10) Repayment
On maturity, the original investment amount is electronically credited to the investor’s bank account.
Also Read: How Interest Rates Impact Mutual Funds
Should you invest in FRSB 2020 (T)?
It will be a good investment strategy to park money in FRSB 2020 (T) in a rising interest rates market. As on February 2023, we are in a rising interest rates market. However, we are near peak interest rates and may have reached the end of the cycle. The high-interest rates may continue till the end of 2023. Post that, the interest rates may fall. How soon the interest rates will fall, by how much will they fall, and for how long will the low-interest rates continue are questions difficult to answer at this point in time. Whenever the interest rates go down, the FRSB 2020 (T) bondholders will suffer. Currently (February 2023), as we are near peak interest rates, it may not be a good idea to invest in FRSB 2020 (T).
In 2023, fixed-income products are expected to do well as the interest rates are high. As of 8th February 2023, the RBI increased the repo rate by 25 basis points to 6.50%. The interest rates on fixed-income products like fixed deposits, small savings schemes, floating rate products, NCDs, corporate bonds, etc., are high and may go up further. Fixed-income investors are spoilt for choice. One such product is the Floating Rate Savings Bonds, 2020 (Taxable) issued by the RBI on behalf of the Central Government. In this article, we will understand what are Floating Rate Savings Bonds, their features and benefits, and whether you should invest in them.
What are Floating Rate Savings Bonds, 2020 (Taxable) - FRSB 2020 (T)?
The Floating Rate Savings Bonds, 2020 (Taxable) or the FRSB 2020 (T), as the name suggests, is a floating interest rate product. Normally, fixed-income products, such as bonds, have a coupon rate, which is fixed throughout the tenure of the product. So, it pays a fixed interest rate at a fixed frequency throughout the tenure of the product. However, in the case of a floating interest rate product such as the FRSB 2020 (T), the interest rate is linked or pegged to a benchmark. As and when the interest for the benchmark changes, the interest rate on the floating interest rate product is revised at the set frequency.
The interest rate on the FRSB 2020 (T) is pegged/linked to the interest rate on the National Savings Certificate (NSC) with a spread of (+) 35 basis points. So, the interest rate on FRSB 2020 (T) will be the NSC interest rate + 0.35%.
For example, the government announced the interest rate on the NSC at 7% p.a. for the period 1st January to 31st March 2023. Accordingly, the RBI revised the interest rate on the FRSB 2020 (T) to 7.35% p.a. (7% NSC interest rate + 0.35%) for the period 1st January 2023 to 30th June 2023. Please note that the interest rate on the FRSB 2020 (T) is revised every 6 months.
Also Read: Floating Rate Savings Bond: What Makes Them Attractive For Senior Citizens?
Features and benefits of the FRSB 2020 (T)
The government started issuing the FRSB 2020 (T) through the RBI from 1st July 2020. The features and benefits of these floating rate bonds include:
1) Who can invest in FRSB 2020 (T)?
An individual resident in India or a Hindu Undivided Family (HUF) can invest. An individual can invest on a single or joint basis. NRIs cannot invest in these bonds.
2) What is the minimum and maximum investment amount for FRSB 2020 (T)?
An individual can start investing with a minimum of Rs. 1,000 and in multiples thereof. There is no maximum limit on the amount that you can invest. The bonds are issued in electronic format. A Bond Ledger Account (BLA) is opened for the investor, and the bonds are credited to it. The investor is issued a certificate of holding as proof of subscription.
3) Where can the FRSB 2020 (T) bonds be applied for?
You can make an application at the branches of nationalised banks and 4 private sector banks.
Table: Branches where the FRSB 2020 (T) can be applied for
(Source: https://rbidocs.rbi.org.in/rdocs/content/pdfs/GOI26062020.pdf)
4) What is the tenure for FRSB 2020 (T)?
The tenure of the bonds is for 7 years. Premature encashment of bonds is allowed for individuals above 60 years only, subject to a minimum lock-in period, penalty, and other specified terms.
5) What is the interest applicable for FRSB 2020 (T)?
As it is a floating interest rate product, the interest is reset half-yearly. The interest rate is reset on the 1st of January and the 1st of July, every year. The interest rate is pegged/linked to the National Saving Certificate (NSC) interest rate. It has a spread of (+) 35 basis points over the prevailing NSC interest rate. As and when the NSC interest rates are revised, the interest rate on the FRSB 2020 (T) is reset on the 1st of January and the 1st of July.
The interest amount is payable to the investor at half-yearly intervals. The half-yearly interest up to 30th June is payable on 1st July, and the half-yearly interest up to 31st December is payable on 1st January. There is no option to pay the interest on a cumulative basis.
The interest is electronically credited to the investor’s bank account.
Also Read: How To Manage Your Investments During A Rising Rate Cycle
6) Taxation on FRSB 2020 (T)
The interest earned on the bonds is fully taxable. It is added to the bondholder’s overall income and taxed at the slab rate.
7) Trading of bonds
The bonds are not tradable in the secondary market. Also, you cannot avail of a loan from any bank, NBFC, or financial institution by offering the bonds as collateral.
8) Nomination
You can make a nomination (Form C) or cancel (Form D) it in the prescribed form.
9) Transferability
The bonds are not transferable. The only exception is the transfer to the nominee or legal heir in the event of the investor’s death.
10) Repayment
On maturity, the original investment amount is electronically credited to the investor’s bank account.
Also Read: How Interest Rates Impact Mutual Funds
Should you invest in FRSB 2020 (T)?
It will be a good investment strategy to park money in FRSB 2020 (T) in a rising interest rates market. As on February 2023, we are in a rising interest rates market. However, we are near peak interest rates and may have reached the end of the cycle. The high-interest rates may continue till the end of 2023. Post that, the interest rates may fall. How soon the interest rates will fall, by how much will they fall, and for how long will the low-interest rates continue are questions difficult to answer at this point in time. Whenever the interest rates go down, the FRSB 2020 (T) bondholders will suffer. Currently (February 2023), as we are near peak interest rates, it may not be a good idea to invest in FRSB 2020 (T).
