(RBI Floating Rate Savings Bonds, FRSB 2020(T), what are Floating Rate Savings Bonds, interest rate payable for Floating Rate Savings Bonds, benefits from Floating Rate Savings Bonds, maturity of floating rate bonds, advantage and disadvantage of floating rate bonds)
On behalf of the Central Government, the Reserve Bank of India (RBI) has issued Floating Rate Savings Bonds, which give an interest rate that is tied to the National Savings Certificate (NSC) and has a spread of (+) 35 basis points. Determining if purchasing this product is a good choice in the current environment of rising interest rates is crucial. Fixed-income products like term deposits, small savings plans, NSC, corporate bonds, and the aforementioned Floating Rate Savings Bonds are appealing possibilities for investors wanting guaranteed income given the anticipated of increased interest rates in 2023. The RBI’s Floating Rate Savings Bonds may offer greater interest rates than term deposits and NSCs, making them possibly a better investment.
As there could be restrictions on bank lending, governments and private businesses frequently rely on borrowing money from the general public to finance various initiatives and expansions. In order to raise money from the market, bonds and debentures are frequently employed. Fixed and variable rate bonds differ in that the interest rate is either constant or is dependent on a benchmark rate.
Difference between fixed and floating rate bonds:
Fixed-rate bonds and floating rate bonds differ in terms of how their interest rates are set. Fixed-rate bonds have an interest rate that is set in advance and stays the same throughout the duration of the bond. The interest rate on floating rate bonds is linked to benchmark rate.
The interest rate on floating rate bonds changes in line with changes in the benchmark rate. For instance, the National Savings Certificate (NSC) interest rate has been tied to the interest rate of the RBI Floating Rate Savings Bonds, with a further spread of (+) 35 basis points.
1.What are Floating Rate Savings Bonds:
These bonds offer a special floating interest rate structure. FRSB 2020 (Taxable) has an interest rate that is correlated to a benchmark rate, in contrast to conventional fixed-income products like bonds that keep a fixed coupon rate during the course of the tenure. The interest rate on the FRSB 2020 (Taxable) is periodically changed in accordance with the updated terms to reflect changes in the benchmark interest rate.
FRSB 2020 (Taxable) offers an interest rate that is correlated with the National Rate for Savings Certificates (NSC), plus a 35 basis point margin. For instance, the FRSB 2020 (Taxable) would offer an interest rate of 7.35% per annum (7% NSC rate + 0.35%) if the NSC rate was announced at 7% per annum. The FRSB 2020 (Taxable) is revised every six months to maintain alignment with the NSC interest rate.
Fixed-rate or floating-rate bonds serve as borrowing instruments that are issued by governments or businesses to raise money. A coupon or interest rate is predetermined for fixed-rate bonds. For instance, you would earn Rs 1000 in fixed interest every year if you bought a bond with a face value of 20,000 and a coupon rate of 5%. Conversely, floating rate bonds have fluctuating interest rates. An established benchmark rate is used to determine the interest rate on a variable rate bond at the time of issuance. The periodic adjustments to the bond’s interest rate, which may be established on a quarterly, semi-annual, or annual basis, are based on this benchmark rate.
2.Features of Floating Rate Savings Bonds :
- 2.1 Who is eligible to purchase floating-rate savings bonds?
Investors can purchase Floating Rate Savings Bonds 2020 (Taxable) if they are Indian citizens or members of Hindu Undivided Families (HUFs). Non-Resident Indians (NRIs) are not permitted to invest in these bonds; nevertheless, joint and individual investments are permitted.
- 2.2 How much may you invest in Floating Rate Savings Bonds (FRSB) 2020 (Taxable) and what are the minimum and maximum amounts?
With multiples of this amount as investment choices, investors can get started with a minimum commitment of Rs. 1000. There is no upper investment limit. The bonds are issued electronically, and investors must open a Bond Ledger Account (BLA) in order to hold them. Proof of subscription is offered in the form of a holding certificate.
- 2.3 What is maturity period or tenure of Floating Rate Savings Bonds:
The bonds have a 7-year term. Only those over 60 are permitted to prematurely encash their benefits, and they must also comply with a minimum lock-in period, penalties, and other rules. The lock-in period is six years for people between the ages of 60 and 70. The lock-in period is five years for people in the 70–80 age range. After four years from the date of investment, those over the age of 80 may withdraw their money.
- 2.4 How to buy floating rate savings bonds?
The RBI has created venues called RBI Retail Direct and NSEGoBid where you can buy the bonds online. To purchase bonds, you must have a demat account. On these services, you must register and upload your KYC documentation. Then, you can buy or sell the floating bonds and make payments using the connected bank account in your demat account.
By completing an application at branches of nationalized banks and some private sector banks, it is also possible to buy these bonds offline.
- 2.5 How much will Floating Rate Savings Bonds pay in interest?
FRSB 2020 (Taxable)’s interest rate is recalculated twice a year, on January 1 and July 1. It has a 35 basis point (+) spread and is correlated to the interest rate on National Savings Certificates (NSCs).The investor will get interest payments every six months on the first of July and the first of January. The investor’s bank account receives the interest via electronic credit. Compound interest payment options are not offered.
The interest rate on NSCs is 7.70% till July 1, 2023. As a result, the FRSB 2020 (Taxable) current interest rate is 8.05% (7.70% NSC rate plus 0.35%).
- 2.6 Taxes:
The bondholder’s total income is added to the interest earned on the bonds, which is fully taxable and subject to the individual’s appropriate slab rate.
- 2.7 Additional crucial elements of FRSB 2020 (Taxable)
- The bonds cannot be used as collateral to borrow money from banks, NBFCs, or other financial institutions, and they cannot be traded on the secondary market.
- Investors may use the required forms to make a nomination (Form C) or to withdraw one they have already made (Form D).
- The bonds are not transferable at the death of the investor, with the exception of a registered person or a legal heir, excluding the cases of transmission.
- Upon maturity, the investor’s bank account is electronically credited with the principal investment amount.
- For more information click on official website of RBI.
3.Benefits or Advantages of Floating Rate Savings Bonds:
There are a number of benefits to investing in Floating Rate Savings Bonds. First of all, these bonds are less volatile than fixed-rate bonds. The interest rates of floating rate bonds are tied to market benchmarks, reducing the impact of market volatility on bond values, but the prices of fixed-rate bonds should adjust based on market interest rates and yields.
Second, bigger yields are offered by Floating Rate Savings Bonds. Coupon payments and any potential discounts or premiums received at the time of purchase are included in the return. The returns from variable rate bonds are often larger than those from other fixed-income investments in an environment where interest rates are rising. The potential returns from floating rate bonds are further increased by adding a spread above the benchmark rate.
The security that Floating Rate Savings Bonds offer is another advantage of investing in them. Since governments often issue these bonds, there is a lower chance of default, which gives investors peace of mind.
Last but not least, portfolio diversification can be aided with Floating Rate Savings Bonds. From a broad economic standpoint, the stock market’s performance and interest rates frequently have an adverse connection. You can balance the risk profile of your portfolio by incorporating variable rate bonds into your investing portfolio. This makes floating rate bonds an appealing choice for those who are interested in diversification because it allows investors to generate good returns with relatively lower risk.
4.Disadvantages of Floating Rate Savings Bonds:
Savings bonds with floating rates provide advantages, but there are also some significant disadvantages that should be taken into account. The potential lower yield in comparison to fixed-rate bonds is one disadvantage. There is a chance that floating rate bonds will have lower yields than fixed-rate bonds because the interest rates of these bonds change with market benchmark rates.
Interest rate risk is another negative aspect. Market interest rate changes and revisions to the benchmark rates of floating rate bonds may occur at different times. This exposes investors to the risk of potential interest rate swings because the coupon payments on variable rate bonds may have lower interest rates than the going market rates.
Credit risk should also be taken into account. All bonds contain some degree of credit risk because they are considered debt instruments, even if it is often low when the government is the bond issuer. As a bondholder, it’s critical to keep an eye on the bond issuers’ creditworthiness in order to gauge any potential credit risk connected to the bonds in your portfolio.
5.Fixed Deposit rate vs FRSB 2020 Vs NSC :
The interest rate structures of fixed deposits, NSCs, and RBI Floating Rate Savings Bonds are distinct from those of fixed deposits, savings certificates, and savings bonds. The central government offers a minor savings program called RBI Floating Rate Savings Bonds 2020 (Taxable), which is based on the interest rate of National Savings Certificates (NSC). The interest rate on these bonds is 0.35 percent more than the rate offered by NSC. As a result, the interest rate on RBI Floating Rate Savings Bonds may be greater than that of the majority of fixed-income securities on the market. Various criteria will determine whether this is a better investment choice than fixed deposits and NSC.
There are two other savings programs available right now that provide interest rates higher than 8%: Sukanya Samriddhi Yojana (SSY) and Senior Citizen Savings Scheme (SCSS). While Sukanya Samriddhi Yojana can be opened in the name of a girl child at any time until she turns 10 years old, SCSS is only available to seniors or people over the age of 60. Therefore, other investors are unable to take advantage of these two schemes’ benefits.
- 5.1 The RBI FRSB 2020 (T) is giving an alluring interest rate of 8.05% as of July 1, 2023. This rate is correlated with NSC interest rates but FDR rate subject to cyclical adjustments by banks.
- 5.2 The 7-year lock-in term for FRSB is longer than the 5-year FD and NSC.
- 5.3 Interest earned on the RBI Floating Rate Savings Bonds 2020 (Taxable) and NSC and fixed deposits is taxable in the hands of the investors. However, you can claim an income tax deduction of up to Rs 1.5 lakh for investing in five-year bank fixed deposits and NSC but It is not too relevant with the new tax regime in place.
- 5.4 You can obtain loans against NSC, but not against RBI Floating Rate Savings Bonds 2020 (Taxable).
- 5.5 The fact that interest is paid semi-annually is the RBI Floating Rate Savings Bonds 2020 (Taxable)’s greatest benefit. These bonds get interest payments twice a year in January and July. NSC earns interest and pays it out when it matures. You have the option of choosing a monthly interest payment under FDR.
- 5.6 The NSC and RBI Floating Rate Savings Bonds 2020 (Taxable) are both safe investment options backed by the government. While India Post distributes NSC, RBI issues the RBI Floating Rate Savings Bonds. Both bonds feature sovereign guarantees, providing total security for the money you invest. In contrast, the Deposit Insurance Program, which covers up to INR 5 lakh, including the principal amount and interest, protects bank fixed deposits.
Conclusion:
At its twice-monthly monetary policy meeting in April 2023, the Reserve Bank of India (RBI) chose to keep the policy repo rate at 6.5%. Some financial experts claim that interest rates on fixed deposits have peaked and will likely remain constant going forward. Experts have emphasized the appealing potential provided by the RBI Floating Rate Savings Bonds 2020 (Taxable) for investors looking for safe and long-term fixed income instruments in this context. Investors must, however, exercise caution because any changes in interest rates could jeopardize their gains over the course of the holding period.
As a result, RBI Floating Rate Bonds are preferred over NSC, particularly for people choosing the new tax system that offers no tax breaks or exemptions. In the end, one should comprehend their financial status and aspirations before making any investments in any field, and they should think about consulting financial specialists.
FAQ:
Q1.What are the RBI Floating Rate Savings Bonds’ minimum and maximum investment amounts?
A minimum investment of INR 1,000 is permitted. The amount that can be invested in RBI Floating Rate Savings Bonds is not capped.
Q2.How long are RBI Floating Rate Savings Bonds valid?
RBI Floating Rate Savings Bonds have a seven-year term.
Q3.Is it wise to invest in floating rate bonds?
Floating Rate Bonds may be a wise investment, particularly if higher interest rates are anticipated. The future returns on any floating rate bond, however, are impossible to predict, yet they often give larger yields than many other financial vehicles.
Q4.What period of time is ideal for investing in floating rate bonds?
It is advantageous to invest in floating rate bonds when there is a market expectation of rising interest rates because their interest rates are linked to a benchmark rate.
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