Floating rate savings bonds: What makes them attractive for senior citizens?

The newly launched floating rate savings bonds are a good investment vehicle for senior citizens or retirees falling in the low income-tax bracket.

Floating rate savings bonds What makes them attractive for senior citizens

The Government of India introduced floating rate savings bonds with an interest rate of 7.15%, available for subscription from July 1, 2020. According to the Reserve Bank of India (RBI), the interest rate would reset at the end of every six months. In a falling interest rate scenario, these bonds have replaced the 7.75% taxable savings bonds that were withdrawn due to the COVID-induced economic slowdown.

Here’s everything you need to know about floating rate savings bonds:

Interest rate and payments

The interest will be payable at half-yearly intervals on 1 January and 1 July. The interest rate will be reset for the first time on 1 January 2021, and thereafter every six months. 

The change in the interest rate is pegged with the prevailing National Savings Certificate (NSC) rate and will be adjusted as 35 basis points (0.35%) over the prevailing rate offered by the NSC. For example, on 1 January 2021, the payable interest rate would be 6.8% (prevailing NSC rate) + 0.35%= 7.15%. The interest rate for the next half-year (i.e., July 2021) will be reset on 1 January 2021. 

The interest payable will get credited to the investor’s account as it becomes due, as there is no option to pay interest on a cumulative basis.

Related: How to select a safe investment for retirement

Taxability on floating rate savings bonds

The return on floating rate savings bonds 2020 will be taxed as per the income tax slab applicable to your income. TDS will also apply. 

Investment limit

While there is no maximum limit for investment, the minimum investment limit is Rs 1,000. You can purchase these bonds in multiples of Rs 1,000.

How to invest in floating rate savings bonds

Floating rate savings bonds can be bought for cash (up to Rs 20,000), demand draft, cheque, or through online payments from designated branches of any public sector bank or HDFC, ICICI, IDBI, and Axis Bank. The bonds will be held in dematerialised format in bond ledger accounts and the investor will be issued a certificate for the same.

Related: Tax Benefits after Retirement

Who is eligible for floating rate savings bonds?

Resident Indian citizens (including joint holdings) and Hindu Undivided Families (HUFs) are eligible to invest in floating rate savings bonds. However, NRIs are not eligible.

Tenure and redemption

The tenure of these bonds is 7 years. However, senior citizens can avail premature redemption in specific cases. Investors in the 60-70 age bracket may encash their bonds after the completion of years. Investors in the 70-80 age bracket may redeem them after 5 years and those over 80 may do so after 4 years. However, a nominal penalty is applicable on withdrawals. 

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What makes floating rate savings bonds an attractive investment option for senior citizens?

With zero credit risk and a low minimum investment amount, floating rate savings bonds can be a good bet for senior citizens. It is also a risk-free investment instrument that offers good returns. 

The non-cumulative, half-yearly interest payment feature of these bonds ensures that senior citizens receive a regular cash flow for their post-retirement needs. In particular, senior citizens in the lower tax bracket who are looking to park their funds can consider floating rate savings bonds. 

Inflation is also set to increase, with the government trying to revive the economy through stimulus packages to combat the pandemic-induced slowdown. If interest rates go up, senior citizens can benefit from the increased rate of interest on floating rate savings bonds. 

Related: Investment options that are popular among retirees

Last words

Every investment product has its advantages and disadvantages. Evaluate your financial objectives, appetite for risk, and retirement needs before investing in any financial instrument. Got a low appetite for risk? Here’s where you can invest.

Disclaimer: This article is intended for general information purposes only and should not be construed as insurance or investment or tax or legal advice. You should separately obtain independent advice when making decisions in these areas.


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