In order to cater to the needs of individual investors who want to invest in debt products with full security, the government introduced RBI floating rate saving bonds in where the rate of interest is linked with the interest being paid by the government on government savings schemes. These bonds were introduced in 2020 to replace the 7.75% savings (taxable) bonds.
Who can buy these bonds and the nomination facility?
These bonds are available only to individuals and a Hindu Undivided Family (HUF). So other entities like trusts, companies, partnership firms, etc., cannot subscribe to these bonds. It is not that all individuals can apply for these bonds. The individuals who are residents of India under the Foreign Exchange Management Act (FEMA) can only subscribe to these bonds.
Therefore, NRIs and persons of Indian origin cannot apply for these bonds. Even Indian citizens who are working outside India or have set up business outside India cannot 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 the guardian of the child. The bonds can be held individually or jointly with other persons. In case of jointly held bonds, these can be held on a joint as well as on either or survivor basis.
Individual applicants can nominate any person to receive the money under these bonds in case of the death of the single or joint holders. You can nominate one or more people for your investments in the bonds. The nomination once made can be cancelled or modified later on any time during the currency of the bonds. You can make a 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 or for an HUF.
Face value, tenure and interest rate of the bonds
The floating rate saving bonds have a face value of Rs. 1000 and are available in multiples of this amount. The bonds have a tenure of seven years, after which they are redeemed. You can buy any number of bonds without there being any upper limit.
Interest on these bonds is paid on a half-yearly basis. The first such payment becomes due on the following 1st January after issue of the bonds. No cumulative option is available under these bonds, as interest is paid on all bonds. Unlike the discontinued bonds, which offered a fixed rate of 7.75% annually, interest on these bonds is not fixed but floats and is reset on a half-yearly basis.
The rate of interest payable on these bonds is linked with the interest rate applicable to National Saving Certificates (NSC) from time to time. The floating rate bonds carry an interest rate which is higher by 35 basis points higher than the one payable on NSC. Since the present rate of interest on NSC is 7.70%, the present rate of interest with a premium of 0.35% is 8.05% for these bonds.
Taxability and TDS on interest
The interest on the RBI floating savings bonds is 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 these 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 a lower rate, you have to submit copies of such a certificate for receiving interest without deduction of tax at source or for receiving interest with lower TDS.
In my opinion, you can submit Form 15G and 15H provided you satisfy the conditions as prescribed for being eligible to submit these forms.
How to subscribe to these bonds
In addition to SBI and 11 other public sector banks, the RBI has also allowed ICICI, 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 has designated some of its branches. The application can be made throughout the year, and there is no closing date for applying for these bonds.
One can tender up to Rs. 20,000 in cash for applying for these bonds. If you wish to apply for a higher amount, you will have to provide a cheque/draft or make a payment through electronic mode for the bonds. The bonds are issued after the money is realised by the bank.
Since the interest and maturity proceeds are directly credited to your account, you must provide your bank account details with the application form.
Transfer and premature redemption of the bonds
The bonds are non-transferable and thus are not tradable in the secondary market. Transfers are allowed only to nominees on the death of the older/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 the security of these bonds.
Normally, no prepayment of the bonds is allowed before their maturity, but an exception is made in case of individual holders who have completed 60 years of age at the time of making such a request. Individuals between 60 and 70 years of age are allowed to go for premature redemption of these bonds in the seventh year of their tenure. The individual bondholder who is between 70 and 80 can go for early redemption anytime after five years, and those who are above 80 years of age can go for redemption after the bonds have run for 4 years.
The redemption payment will only be made on the next due date for payment of interest, i.e., 1st January or 1st July, after the application for such redemption is received. While paying such maturity proceeds, 50% of the interest due for the last half year shall be deducted as a 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 holders 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 jainbalwant@gmail.com and his X handle @jainbalwant
