After terminating the popular 7.75% (taxable) bonds on 28 May 2020, the government has announced the launch of a new series of bonds with an interest rate of 7.15%. As per the Reserve Bank of India (RBI) June 25th press release, the interest rate on these bonds will be reset every six months, the first reset being on January 01, 2021. There is no choice to pay interest on a cumulative basis, that is, interest will be payable in every six months, instead of having an option to receive it at maturity. The bonds will have a tenure of seven years. Only resident Indians or Hindu Undivided Families (HUFs) are eligible to subscribe to the bonds.
The previous 7.75% RBI bonds offered a fixed interest rate for the tenure of the bonds. Further, they also offered the option to receive the interest either in cumulative (payable at maturity) and non-cumulative basis (payable every six months).
The notes for the new bonds have a minimum subscription of 1,000 and one can subscribe in multiples of 1,000. There is no upper limit for investment in them. The interest rate on the bonds will be paid on 1st January and 1st July of every year. The interest received from these bonds will be taxed as per the income tax slab applicable to the investor's income and TDS will also be applicable on the interest income. One can also opt to reinvest the interest to buy fresh bonds in the multiples of 1,000 to compound their money. However, these new bonds will again have a fresh tenure of seven years.
Moreover, a holder will not be able to trade or use these bonds as collateral for loans. However, they may be inherited by the legal heirs of the holder. Also, premature redemption will be available for senior citizens in specific cases.
Holders will have to invest in the form of cash (up to Rs 20,000)/drafts/cheques or any electronic mode acceptable to the Receiving Office. Applications for the bonds will be in the form of Bond Ledger Account and will be received in the designated branches of SBI, nationalised banks, IDBI Bank, Axis Bank, HDFC Bank and ICICI Bank. The bonds will be issued only in electronic form and held at the credit of the holder in an account called 'Bond Ledger Account', opened under the Receiving Office.
Financial planners have opined in favour of them. Kalpesh Ashar, Founder, Full Circle Financial Planners and Advisors, highlighted the governmental guarantee behind the bonds, thus making them quite a low risk. He also indicated the floating rate on them as a favourite. According to Prableen Bajpai, founder of Finfix Research and Analytics, a wealth management firm, “given the current situation, these bonds are a decent offering, considering the safety aspect and no upper limit for investment. People, especially senior citizens looking to park money in safer options for a long tenure and not requiring regular monthly income (since the payout is biannual) can consider them."
Senior citizens who fall in lower tax brackets and want a fixed income can consider these bonds. However, they should be conscious if there is a lack of liquidity in them and the fact the monthly interest option is not available.
For those who are still building up savings and don't need regular income, a tax-free government savings instrument like PPF (Public Provident Fund) may deliver better value.