The interest rates on deposits of public sector banks (PSBs) have steadily declined over the past couple of years. Most PSBs interest rates of less than 7 per cent across tenures. In this light, RBI’s bonds seem attractive, given the rate on offer – 7.75 per cent – that too for a tenure of seven years.
These bonds are popularly known as RBI or GOI bonds and are available on tap all through the year through nationalised banks. A few private sector banks too allow these investments – Axis, ICICI and HDFC banks.
The interest, 7.75 per cent, is payable half-yearly. There is a cumulative option too. Investments compound at half-yearly rests in this option. An investor is paid a maturity value of Rs 1703 for Rs 1000 invested.
You can invest a minimum amount of Rs 1000 and there is no upper limit. These bonds are issued in demat form.
A taxing option
Investments in this bond do not get any tax breaks. The interest paid is clubbed with the income of the investor and taxed at his/her slab rate.
“On non-cumulative RBI bonds, there is a provision to deduct tax at source (TDS),” says C S Sudheer, CEO and founder of IndianMoney.com.
RBI bonds vs. other fixed-income options
The offering looks favourable if you compare it with other fixed income options. “At almost no risk, investors are getting 7.75 per cent returns for seven years. No other option with similar risk profile offers you such returns for that time frame,” says Ajay Manglunia, managing director and head institutional fixed income, JM Financial.
For a five-year period, you have the options such as the National Saving Certificate that offers 7.9 per cent. If you are a senior citizen, then the Senior Citizen Saving Scheme (SCSS) is an attractive option that offers 8.6 per cent for a five-year time frame. SCSS investments up to Rs 1.5 lakh per financial year are eligible for tax deduction under section 80C. The interest earned is clubbed with the income of the investor and taxed at the marginal rate.
Most PSBs offer interest rates in the range of 6.1 to 6.75 per cent. These are not attractive, especially on a post-tax basis.
Pre-mature withdrawals difficult
The biggest drawback of these bonds is their poor liquidity. They cannot be traded, nor can be transferred. You cannot offer these bonds as collaterals for any loan. However, there is a provision for early redemption for senior citizens, subject to conditions. Depending on your age bracket - 60-70,70-80 and 80-plus – you can redeem these bonds within six, five or four years from the date of issue.
Should you invest in these bonds?
“Investors looking for stability of returns and willing to forego liquidity can look at this investment option,” says Manglunia. These bonds definitely work for individuals in the lower income tax brackets and those with minimal liquidity needs. Earlier, these bonds used to offer 8 per cent rate of interest. However, in January 2018, RBI brought it down to 7.75 per cent. “If and when RBI reviews this bond offering, the rates may be lowered further in line with the trend of reducing interest rates in the economy,” says Joydeep Sen, founder of wiseinvetor.in.
By investing at regular intervals, you can spread your investment across maturities. This would ensure that the bonds mature over a period of time and you gets cash inflows at regular intervals.
RBI bonds are an attractive investment option if you want to keep your capital safe. You should take the plunge if and only if you have the ability to hold on to them till maturity.
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