Last day for subscribing to RBI’s 7.75% taxable bonds; should you invest?

Falling interest rates environment have led the Reserve Bank of India to stop accepting fresh applications for its 7.75 per cent savings (taxable) bonds (RBI bonds), effective from the closing hours of today. If you are keen, you can rush to invest by closing hours of banks today. Here are some key features of the bonds.

What works

Only resident individuals and HUFs (Hindu undivided families) can invest in these RBI bonds. The minimum investment in RBI bonds is Rs 1000 and there is no upper limit on investments.

RBI bonds have a tenure of seven years and offer 7.75 per cent rate of interest per year, payable half-yearly. The investor also has the option of taking the cumulative option. Since these bonds are issued by the Government of India, there are no credit risks.

At a time when the interest rates on small-saving schemes are going down, this product appears attractive. For example, the public provident fund offers 7.1 per cent and the senior citizen saving scheme offers 7.4 per cent rate of interest. Bank fixed deposits for senior citizens offer around 6.5 per cent.

In a falling interest rate regime the rate on offer on RBI bonds make it an attractive investment option.

What does not work

RBI Bonds suffer from low liquidity. You cannot transfer these bonds before maturity in the secondary market. These bonds cannot be used as a collateral for any loan. The investor has to be mentally prepared to hold on to these bonds till maturity. Investors aged more than 60, 70 and 80 years of age have the option of surrendering them after completing six, five and four years from date of issue, respectively.

Taxation

The interest paid on these bonds is added to the income of the investor and taxed at the slab rate. There is no tax benefit available for the investments made in these bonds.

How to invest?

RBI has made it clear that the applications on the last day will be accepted only in case the funds have been realized by May 28, 2020. “You can apply for these bonds in select branches of banks, provided you have the same bank’s cheque to pay for it or the bank allows fund transfer. Alternatively, you can visit the stock holding corporation of India’s website and apply for these bonds using Aadhar-based KYC and do online fund transfer,” says Parul Maheshwari, a certified financial planner. A few stock brokers also allow online application provided you have clear funds. “While applying for these bonds today, do check for the cut-off time for each intermediary or point of sale,” she adds. Given the rush on the last day, there could be glitches, especially in the online process.

What if you can’t invest today?

RBI Bonds are expected to come back soon. You may have to settle for a tad lower rate of interest. In 2018, the RBI increased the tenure of the bond to seven years from six years earlier. Interest rate on offer was changed from 8 per cent to 7.75 per cent.  As the government plans to increase spending to fight the COVID-19 pandemic, it will require funds and RBI bonds should be one of the means to raise money.