The government launched the Floating Rate Savings Bond in July 2020, with an inaugural interest rate of 7.15 per cent. These bonds, which are taxable, currently, offer 7.35 per cent interest rate and are expected to rise to 8.05 per cent later this year.
It is because the interest rate of these bonds are re-set every January and July based on the prevailing rate of the National Saving Certificate (NSC), typically with a spread of 35 basis points (bps) over the NSC rate. As the government has recently increased the interest rates for small savings schemes, including NSC, to 7.70 per cent, it is expected that the rate could touch 8.05 per cent with the addition of 35 bps.
Buying Floating Rate Savings Bonds
The bonds are issued at a face value of Rs. 1,000 and in multiples thereof. The rate as discussed earlier is reset every six months, aligning with the coupon payment date.
These bonds have no maximum investment limit. However, interest earned on the bonds is taxable under the Income-tax Act, 1961, based on the relevant tax status of the bondholders. Tax will be deducted at source on interest payments, although exemptions are available for individuals who provide a declaration of tax exemption along with the necessary supporting documents.
Floating Rate Savings Bonds are not tradable in the secondary market and cannot be used as collateral for loans from banks, financial institutions, or non-banking financial companies.
The bonds have a maturity period of seven years, but premature encashment is allowed for investors aged 60 and above, subject to a minimum lock-in period of four to six years, depending on the investor's age. Lock in period for investors aged 60 to 70 is six years from the date of issue.
Investors can lock in at the current rates to shield them from future rate decreases. But if and when rates are revised downwards new investments will be at lower rates.
Future Rate Hikes
The rates for Floating Rate Savings Bonds are linked to NSC, a small savings scheme, which in turn, is linked to government bond yields. The government has consistently aimed to prevent the rates of small savings schemes from falling. In a recent announcement, the Centre revealed a significant increase in the interest rates for the April-June 2023 quarter. Among them, the NSC saw the highest surge, reaching 7.7 percent, a rise of 70 bps. This rate adjustment was in response to the upward trend in government bond yields.
The government last increased the interest rates for small savings schemes in December 2022 and in the previous quarter, breaking a streak of nine consecutive quarters with unchanged rates. However, it is important to recognize that bond yields are influenced by the overall state of the economy and inflation.
Says Sriram Jayaraman, a SEBI-registered Investment adviser and Income tax planner: “Predicting future changes in inflation and interest rate movements is challenging.” Jayaraman suggests that RBI floating rate bonds are a safe investment for people who require an income but senior citizens should first invest in the Senior Citizens Savings Scheme (SCSS), as the limit has been increased to Rs. 30 lakh from Rs. 15 lakh. Once this limit is utilized, additional funds can be invested in RBI floating rate bonds, he says.
“Interest can move lower from here as in the short term we are seeing a decreasing trend in 10 year Gilt yield,” he says.
But despite fluctuations in government bond yields, the historical rates of NSC and other small savings schemes have either remained unchanged or increased since June 2020. This can be attributed to the government's commitment to maintaining attractive rates by adding a spread to prevent rates from declining. If this trend persists, investors can anticipate higher yields from floating rate bonds in the future.
