HOW TO INVEST IN RBI BONDS?
In the scenario of falling interest rates of fixed income sources such as fixed deposits offered by banks, the RBI bonds prove to be a better alternative. It is one of the best investment options for investors looking for a fixed income source which is safe and offers guaranteed returns. RBI bonds offer a little higher returns than the bank fixed deposits. The Government of India has announced the launch of the floating rate savings bond 2020 scheme. The scheme comes with a minimum investment of Rs. 1000 and there is no limit on the maximum amount you can invest.
FEATURES OF RBI BONDS:
- The bonds are open to investment including joint holdings by Indian residents and Hindu Undivided Families. NRIs are not eligible to invest in these bonds. These bonds may be held on behalf of a minor by their parents or a legal guardian.
- The bonds are held in electronic form and at the credit of the holder in an account called the Bond Ledger Account. The Bond Ledger Account will be opened by the receiving office in the name of the investor.
- The maturity period of these bonds is seven years from the date of issuance. The bond shall be repayable at maturity. The maturity period for investors in the age bracket of 60-70 years is 6 years, for investors in the age bracket of 70-80 years it is 5 years and for investors in the age bracket of 80 years and above it is 4 years. Premature recovery is only allowed in some specific cases of senior citizens. In case of premature withdrawal, 50 percent of the interest due and payable for the last six months of the holding period will be recovered as a penalty from the investor.
- The interest on the bonds is payable semi-annually on 1st January and 1st July every year. The interest shall be paid at 7.15 percent. Then the interest for the next half year will be reset every six months. There is no option to pay interest on a cumulative basis.
- Income from the bonds is taxable. Tax will be deducted at source while the interest is paid.
- Nomination facility is available in these bonds. The bond holder can nominate one or more persons in accordance with the provisions of the Government Securities Act, 2006 and the Government Securities Regulations, 2007. The nominee will be entitled to get the benefits after the death of the bond holder.
- The bonds are not transferable. The transferability is only limited to the nominee or the legal heir in case of death of the bond holder.
- The bonds are not tradable in the secondary market and are also not eligible as collateral or security for secured loans from Banks, Financial Institutions and the Non-Banking Financial Company.
Investment in these bonds is made in the form of cash or cheque or drafts or any electronic mode acceptable by the receiving office(up to Rs. 20,000/-). Apart from the lack of liquidity, there is no monthly interest payment option for these bonds. But, on the brighter side, these bonds come with the highest credit quality. Investors looking for better and fixed returns for investing lump sum amounts should invest in these bonds offered by RBI. It offers zero credit risk which makes them suitable for senior citizens. For the non senior citizens, in the low income tax bracket it’s a good investment plan if they are comfortable in receiving interest at floating rate semi annually and are willing to hold on these bonds till maturity. But, people in the higher tax bracket should go for tax-free bonds issued by public sector undertakings. They can also go for short term debt funds if they do not require money before three years. Senior citizens looking for regular income after retirement should go for the Senior Savings Scheme and the Pradhan Mantri Vaya Vandana Yojna as the interest rate on these bonds may still reduce as some debt market experts predict that the interest rates in India may go down a little bit more. The instant drop in the rates of fixed income options in India has made RBI bonds relatively attractive if you are someone looking for fixed returns. If you have a low risk appetite and want guaranteed returns for next seven years then these bonds are a good investment option. If you want to invest for any medium term financial goal like education expenses of your children or wedding then these bonds may meet your requirements. You can lock in that portion of your income that can not be accessed for a period of seven years. Also, senior citizens can opt for investing in these bonds along with other fixed income schemes like fixed deposits, senior citizens savings scheme and also the Pradhan Mantri Vaya Vandana Yojna.