What is on offer?
Floating rate saving bond (FRS) comes with a minimum investment of Rs 1,000 and there is no limit prescribed on the amount of money you can invest. Tenure is seven years. Both resident individuals and HUF can invest in these bonds, but non-resident individuals are not allowed to invest. Bonds can be bought from public sector banks and select private sector banks like Axis Bank, IDBI Bank, HDFC Bank and ICICI Bank. .
Since this bond is issued by the government of India, there is little credit risk. In these times when investors seek safety and return of capital at the end of the tenure, the floating rate bonds inspire confidence.
The interest rate will not be fixed; it will be floating. As and when interest rates rise, these bonds will give a higher interest rate to bond holders. The interest payable on January 1 and July 1 will be linked to the then prevailing rate of interest on National Saving Certificate (NSC). FRS will pay 35 basis points more than the rate offered on NSC.
As of now the rate of interest payable on NSC stands at 6.8 percent and the FRS holders will be paid at the rate of 7.15 per cent on January 1, 2021. Going forward, the then prevailing rate of interest on NSC will decide the rate of interest payable on the FRS. The issuer has discontinued the option to receive the interest at the end of maturity of the bond.
The interest payable on January 1 and July 1 will be linked to the then prevailing rate of interest on National Saving Certificate (NSC).
What does not work?
The bonds cannot be traded in the secondary market, nor can be used as a collateral for a loan. However, the government has given some flexibility to the senior citizens. Investors in the age bracket of 60 to 70 years can opt for premature encashment of the FRS after completing six years from the date of issue, subject to conditions. Investors in the age bracket of 70 to 80 years can do so after completing five years whereas for investors above 80 years of age, lock in of four years apply.
Should you invest?
Apart from the lack of liquidity, there is no monthly interest payment option for these bonds. FRS pays interest every six months and the quantum of all future interest payouts is not known at the time of investment.
On the bright side, the bond comes with the highest credit quality. “Given the sovereign nature and the excess return offered over and above the rate of interest offered by NSC, it adequately compensates the investor for foregoing his liquidity,” says Joydeep Sen, the founder of wiseinvestor.in.
Investors should not ignore the safety of their capital in search of high return, he says.
There is no other floating rate based saving scheme meant for individual investors to compare with. The close comparison can happen with the Post Office Monthly Income Scheme (MIS), Senior Citizen Saving Scheme (SCSS) and Pradhan Mantri Vay Vandana Yojana (PMVVY). MIS pays 6.6 per cent rate of interest whereas SCSS offers 7.3 per cent. PMVVY in its new avatar pays 7.4 per cent.
Senior citizens looking for regular income should first exhaust their limits with SCSS and PMVVY. If you still have money left to invest, then opt for FRS. Remember, interest rates on FRS may still reduce as some debt market experts predict that interest rates in India may go down a bit more. Even so, FRS scores over 5-year senior citizen fixed deposits offered by nationalized banks that offer around 6.5 per cent return.
Interest income will be taxed as per your income-tax rates. For non-senior citizen investors in the low income tax bracket this is a good investment option provided they are comfortable receiving interest at floating rate and willing to hold on to these bonds till maturity.
For those in the higher tax brackets (more than 30 per cent), go for tax- free bonds issued by public sector undertakings.
Investors in a high income tax bracket with no need for a regular income can also look at short term debt funds, but make sure you don’t need the money before three years.