Is It A Good Time For Seniors To Buy Floating Rate Savings Bonds?

Reserve Bank of India’s (RBI) floating rate savings bonds (FRSB) launched in 2020 offer 8.05 percent interest, valid till December 2023. It could be a good time for seniors to invest. They can consider these bonds to diversify holdings if they don't have immediate cash requirements. The coupon rate of these bonds is reset every six months, consistent with the returns of the National Savings Certificate (NSC) plus 35 basis points (bps), and the interest is paid half yearly. Like government securities and bank fixed deposits (FDs), FSRBs offer safety, with a lock-in of seven years. Those interested can buy them through the designated scheduled commercial bank branches, post offices, and RBI’s Retail Direct portal. FSRBs can be an alternative to other fixed-income instruments like FDs, T-bills, Senior Citizens Savings Scheme (SCSS), Post Office Monthly Income Scheme, etc. Seniors can supplement their income by investing in these bonds.

Salient Features of Floating Rate Bonds

Senior citizens can buy these bonds in their name or on behalf of their children. Non-resident Indians (NRIs), however, are not eligible to invest in FSRBs. The minimum investment is Rs 1,000 with no upper limit. These bonds can be purchased either online or offline. FSRBs have a seven-year lock-in but can be canceled or prematurely withdrawn with a penalty. FSRB interest rates are in sync with NSC returns plus 0.35 percent. The interest is accrued from day one and it is added to the principal value twice a year. Also, these bonds are exempt from wealth tax. The ownership of the bonds is non-transferable, but there is a nomination facility. FSRBs can be transferred to the nominee when the bondholder dies. After maturity, the invested amount is automatically credited to the savings bank account used to buy the bonds. Regarding taxation on FSRBs, the interest income is taxable in the hands of the investor, and deducted at source.

Should Senior Citizens Invest In These Bonds?

Before deciding, seniors must consider their investment horizon, cash needs, taxation, and interest rates. Says Abhijit Talukdar, a Sebi-registered investment adviser and founder of Attainix Consulting, “An astute investor, who can predict the interest rate cycle correctly, will find it favorable to invest in floating rate bonds. Senior citizens, who depend on retirement income from FDs, should stay with assured instruments like fixed deposits. Floating rate savings bonds are best avoided by seniors due to the uncertainty associated with such instruments.” Also, remember that FSRBs have a 7-year lock-in, so only invest if you don’t need cash in the short term. The tax liability can also be a factor if you have a taxable income, so choose the investments judiciously.