After discontinuing its 7.75 per cent fixed interest rate bonds on May 28, 2020, the banking regulator Reserve Bank of India (RBI) has come out with new floating rate savings bonds on June 26, 2020, which will be available from July 1, 2020. Let us understand the main features of these new bonds.
Who can buy these bonds and nomination facility
The bonds are available only to individuals and Hindu Undivided Family (HUF). So other entities like trusts, companies, partnership firms, etc., cann’t subscribe to these bonds. It is not that all the individuals can apply for these bonds. The individuals, who are residents of India for the purpose of Foreign Exchange Management Act (Fema) can only subscribe to these bonds. So, NRI and Persons of Indian Origin (PIO) can’t apply for these bonds. Even Indian citizens who are working outside India or have set up business outside India can not apply for these bonds. The individual holders of the bonds who subsequently become non-resident are allowed to continue to hold the bonds even after becoming a non-resident under Fema.
You can also apply for these bonds even in the name of a minor as guardian of the child. The bonds can be held either individually or jointly with other persons. In case of jointly held bonds, these can be held jointly as well as on either or survivor basis.
Individual applicants can nominate any person to receive the money under these bonds in case of death of the single or joint holders. You can nominate one or more person for your investments in the bonds. The nomination once made can be cancelled or modified later on. You can make separate nomination for different investments made in the bonds. However, nomination is not allowed to be made in case the application is being made in the name of a minor.
Face value, tenure and interest rate of the bonds
The new saving bonds will have a face value of Rs1,000 and will be available in multiple for this amount. The bonds will have tenure of seven years, after which the same will be redeemed.
Interest on these bonds shall be paid twice during a year. The first such payment will become due on January 1, 2021. Unlike the earlier bonds which offered the bond holders a cumulative option to receive the interest at the time of maturity, no cumulative option is available under the new bonds now being floated by RBI.
Moreover, unlike the discontinued bonds, which offered interest at the fixed rate of 7.75 per cent? annually, interest on the new bonds will be floating and will be reset every half year. The rate of interest payable on these bonds is linked with interest rate applicable for National Saving Certificates (NSC) from time to time. The floating rate bonds will have interest rate higher by 35 basis points higher as compared to the one payable on NSC. Since the presently the rate of interest on NSC is 6.80 per cent the interest for the first half year with a premium of 0.35 per cent has been fixed at 7.15 per cent for the new bonds.
Taxability and TDS on interest
The interest on the RBI floating savings bonds will be fully taxable in your hands and you are not entitled to any tax benefits in respect of interest received on such bonds. However, if you have borrowed any money to make investments in the bonds, the interest if any paid for the money so borrowed will be a deductible expenditure.
Tax will be deducted on interest paid on such bonds. However, in case you have obtained any certificate from the tax department for nil deduction or deduction at lower rate will be required to submit copies of such certificate for receiving interest without deduction of tax at source or for receiving interest with lower TDS. Though the notification doesn’t provide for submission of Form-15G and 15H, in my opinion you will be entitled to submit these forms provided you satisfy the conditions as prescribed for being eligible to submit these forms.
How to subscribe to these bonds
In addition SBI and 11 other public-sector banks (PSBs), the RBI has also allowed ICIC, HDFC, Axis and IDBI to accept the application for these bonds. The application for these bonds can either be made online or offline. For accepting applications for these bonds, each bank will designate some of its branches. The application can be made throughout the year and there is not closing date for applying for these bonds. One can tender upto Rs20,000 in cash for applying for these bonds. If you wish to apply for higher amount you will have to provide cheque/draft or make payment through electronic mode for the bonds. The bonds will be allotted when the money is realised by the bank.
Since the interest and maturity proceeds will be directly credited to your account, it is mandatory for you to provide your bank account details with the application form.
Transfer and premature redemption of the bonds
The bonds are non transferrable and thus are not tradable in the secondary market. Transfers are allowed only to nominees on the death of holder/joint holders. Since no transfer is allowed in respect of these bonds, you will not be able to obtain any credit facility or loan against security of these bonds.
Normally no prepayment of the bonds is allowed before its maturity before its maturity but an exception is made in case of Individual holders who have completed 60 years of age at the time of making such requires. Individual between the age of 60 and 70 are allowed to go for premature redemption of these bonds in the seventh year of its tenure. The Individual bonds holder who is between 70 and 80 can go for early redemption anytime after five years and for those are above 80 years of age can go for redemption after the bonds have run for 4 years. The redemption payment will only be only made on the next due date for payment of interest i.e. January 1 or July 1 after application for such redemption is received. While paying such maturity proceeds 50 per cent of the interest due for the last half year shall be deducted as penalty for premature redemption. In case the bonds are held in joint names, you will be entitled to go for such premature redemption if one of the joint-holder has completed the requisite age on the date of such application.
However, no premature redemption facility is available in respect of investments held in the name of an HUF.
The writer is a tax and investment expert and can be reached at firstname.lastname@example.org and on his twitter handle @jainbalwant