Floating Rate Savings Bonds (FRSB)

Risk is usually the first thing that comes to mind when someone talks about investments. Most young investors are always up for taking risks in their investment with the objective of earning higher returns. However, there are also some investors who are risk-averse and are afraid to take risks in their investments. 

For such risk-averse investors, the government offers various schemes that offer them with decent returns and interests with lower risk. Also, investing in government schemes is considered to be a safer investment than other investments in the market. 

On July 1, 2020, the government of India introduced a new scheme called FRSB (Floating Rate Savings Bonds) that offers a 7.15% interest rate to its bondholders with a floating interest rate. 

Let’s understand FRSB/RBI Taxable Bonds and see what this scheme offers to its investors. 

What are Floating Rate Savings Bonds?

To put it in simple words, the Floating Rate Savings Bonds are debt instruments issued by the government of India with a floating interest rate; this means that the interest rate will fluctuate from time to time as per the benchmark interest rate.

What do Floating Rate Savings Bonds offer?

On July 1, 2020, the Government of India introduced the floating rate savings scheme. The FRSB comes with a maturity period of 7 years, and the interest rate will keep changing from time to time during the tenure of the scheme. 

As of now, the interest rate on the scheme is 7.15% per annum which will be paid after every 6 months. Investors can start their investments with a minimum amount of Rs. 1,000 with no maximum limits of the investment in the bonds. However, cash investments can be done with a maximum amount of Rs. 20,000.

Features of Floating Rate Savings Bonds

Here are some salient features of the Floating Rate Savings Bonds:

Eligibility for Investment - The bonds are open to investments for individuals (including joint family) and HUF (Hindu Undivided Family). NRIs are not eligible for investments in this bond scheme. 

Subscription - Investors can subscribe to these bonds with a minimum amount of Rs. 1,000 and there is no maximum limit for investment. But, there is a maximum limit of Rs 20,000 on cash transactions. Another mode of investments via cheques, draft, and digital mode is acceptable for the investment.

Form of the Bond - Credited bonds will be held in the bondholder’s account in an electronic form. This electronic account is called BLA (Bond Ledger Account).

Issuance of the Bonds - Designated branches of SBI, HDFC, AXIS, ICICI, IDBI, and nationalized banks will receive the application for these bonds in the form of BLA.

Floating Interest - 

• Interest Payment - The interest rate on bonds will be paid every 6 months on January 1 and July 1 till the tenure of the bond. There is no option to get the interest rate on a cumulative basis.
• Interest Rate - The interest/coupon rate on the bonds will be reset every 6 months. The coupon rate will be payable on Jan1, 2020, at a fixed interest of 7.15%.
• Base Rate - The interest rate on bonds will be pegged with the prevailing NSC (National Savings Certificate) rate with a spread of 35 basis points over the respective NSC rate. 

Taxation - The interest rate on the bonds will be taxable under the Income Tax Act 1961, depending on the tax slab the investor falls in. There are also going to be TDS implications if the certificate of exemption is not submitted for not deducting TDS.

Transferability - There is no provision for transferring the bonds except in the case of the bondholder’s demise, wherein their nominee can get the bonds.

Financing on Bonds - These bonds cannot be used to take loans from banks or NBFCs etc. 

These Floating rate savings bonds are being considered as a highly safe investment option with good returns in comparison to the fixed deposit (FD) interest rates in banks that are trending only lower. Currently, a 1-year FD with SBI fetches an interest of just 5.1% per annum. 

Additionally, investors need to keep their tax slab in mind during the tenure as the new investment avenue lacks liquidity being non-tradable and non-transferable. 

Who Should Invest?

FRSB looks attractive currently as it offers higher returns compared to other fixed return instruments. The product will serve the senior citizens on two accounts, a regular flow of income, and a higher rate of interest. This scheme might be ideal for retired people to earn higher interest than the fixed deposit scheme offered by the bank.

However, this bond scheme does not offer much for youngsters. For individuals in the higher tax bracket, the return post-tax implication reduces to about 4.5%, which is pretty low. Moreover, young investors should consider investing in Equity and Debt Oriented Mutual Funds not only for higher returns but for tax efficiency too. 

The lock-in period of this scheme is seven years long, and bondholders cannot exit in the middle. So, this is where the Equity and Debt scheme has an advantage over the Floating Rate Saving Scheme.

Things to Remember Before Investing

Here are certain things that should be kept in mind before investing in the Floating Rate Savings Bonds:

• The bonds cannot be used for trading in the secondary market and cannot be used as collateral for bank loans, financial institutions, NBFCs, etc.
• Individual holders of the bond, being an individual can make a nomination.
• The bonds in the bondholder’s account cannot be transferred except in the case of their demise. Bonds will be transferable in their nominee/legal heir’s account.

Final Thoughts

Nothing is certain, but it is quite natural to be extra careful with the money you are investing. The Floating Rate Savings Bonds scheme might look attractive at the point, but it is important to remember that your money will be a lock-in for 7 years without getting any tax benefits. 

So, before selecting this bond scheme, it becomes important to carefully analyze the different investment options available in the market and then make your final investment decision.