The popular 7.75 per cent savings (taxable) bonds were withdrawn by the government on May 28. That led to some heartburn. However, the government has now brought in a new series of bonds, which will pay an interest rate of 7.15 per cent starting. Yes, these floating-rate bonds will not have a fixed interest forever. The interest rate these taxable bonds will pay would be reset every six months, but the rate will always be 0.35 per cent points more than the prevailing rate on National Savings Certificates (NSCs). Are these new floating-rate bonds suitable for you? Read on to know more.
The floating-rate bonds will have a fixed tenure. The tenure is seven years. This is a regular income option since interest will be paid periodically. If that suits you, go ahead and consider investing in these bonds. The interest earned is not tax-free, unlike some other bonds. So, the interest payment received by you will be liable to tax as per your slab rate.
The floating-rate bonds will be available for purchase from all nationalized banks. Plus, specified private sector banks like HDFC Bank, ICICI Bank, and Axis Bank, are also expected to sell them.
The floating-rate bonds can be bought only by resident Indians or Hindu Undivided Families (HUFs). Thus, NRIs who are reading this piece will have to give this a miss. The government has said that NRIs are not allowed to subscribe to these bonds.
Coming to the investment amount, the floating-rate bonds come at a competitive price. You need to spend a minimum of Rs 1,000 to buy. For those who have a lot more money to invest, you will be happy to know that there is no maximum limit for investment. The interest rate on the bonds will be paid on January 1 and July 1 every year. So, you can expect the first interest rate payment on January 1 next year i.e. 2021.
Keeping bond papers, etc., is a cumbersome process. Fortunately, these bonds will be issued and held in an electronic Bond Ledger Account (BLA).
There is no product without some disadvantages. The floating-rate bonds can’t be traded or used as collateral for loans. Many bonds, mutual fund units, bank deposits, and even insurance policies allow you to take a loan against them.
One good thing is that the floating-rate bonds can be inherited by the legal heir(s) of the bondholder. This is suitable for parents/spouses who can plan succession by using financial avenues like floating-rate bonds.
The lack of anytime liquidity in the floating-rate bonds is disappointing. Premature redemption will be available for senior citizens only. For non-senior citizens too, there may be a need to prematurely redeem your money lying in bonds and so far the government has not given any facility to do it. Also, since the bonds are not tradeable, you cannot even sell them off to a buyer even if you get one.
One of the main reasons to buy the floating-rate bonds is the sovereign or government guarantee behind them. This virtually means these bonds are zero risk, since the government always pays its debt. In the backdrop of what has happened in the debt mutual space, zero credit risk is a great thing.
For those who are comfortable with taking small risks to earn more, a floating rate bond is actually a good thing. The bond’s interest rate will adjust higher when overall rates in the economy rise. Usually, when there is high inflation, interest rates are hiked. But the floating-rate nature of the bonds means that when interest rates head lower, the rates on the bonds will also be cut. The one major positive is that the floating-rate bond interest rate will always be 0.35 per cent points more than the prevailing rate on National Savings Certificates (NSCs). This at least gives you a return support level in as far as the interest rate is concerned.
The floating-rate bonds come with a lower tenure than Public Provident Fund (PPF), Sukanya Samriddhi Yojana (SSY), and Kisan Vikas Patra (KVP). If you are a senior citizen, you have the option of investing in Pradhan Mantri Vaya Vandana Yojana (PMVVY) and Senior Citizens Savings Scheme (SCSS). Among these alternatives, SSY, SCSS, and PMVVY currently offer higher rates than the floating-rate bonds, but these options have maximum investment limits.
Whenever you decide to buy any fixed income type instrument, always consider the post-tax return. We can understand that the pre-tax return looks attractive. But taxes make all the difference. Floating-rate bonds or any other bonds where the interest rate is taxable must be analyzed through the post-tax lens. Any person in the lower tax bracket, who wants a regular income, should consider floating-rate bonds.
Floating-rate bonds, at this moment, are not ideal for building up savings. For that kind of financial goal, you should look at tax-free government savings instruments like PPF.
The writer is a journalist with 14 years of experience