RBI savings bond

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The Reserve Bank of India recently announced  the launch of 7.75 percent Savings (taxable) Bonds, 2018 (RBI Bond). The notification not only changed the interest rate payable to 7.75 percent against 8 percent but also increased the tenure to seven years from six years earlier, among other changes. The bonds will be issued from January 10. In this backdrop, are these bonds a worthy investment option?

Conservative investors looking to lock in their returns can look at these bonds. However, do ponder over alternative options and your ability to hold on to these bonds till maturity. Let us look into the details of the new offering and if it suits your investment needs.

These RBI bonds come with a rate of interest of 7.75 percent which is comparable to the interest offered on the small saving schemes such as National Saving Certificate.  Recent rate cut on the RBI bonds was announced to bring the interest rate on offer in line with that offered on the small saving schemes. For example, NSC offers 7.6 percent rate of interest for a five year tenure. The RBI bond offers 15 basis points extra for seven years tenure.

The RBI bond, however, comes with some drawbacks. You do not get any tax benefits for investing in them. Neither the investment fetches tax deduction nor the interest earned is tax-free. You cannot offer these bonds as a collateral while raising loans. The bonds are not traded in secondary market and cannot be transferred. The bonds are issued in demat mode only.

Though the bond comes with seven year tenure, senior citizens can surrender them earlier. For example lock-in period for investors in the age bracket of 60 to 70 years will be 6 years from the date of issue, for investors in the age bracket of 70 to 80 years, the lock in period will be 5 years, and for 80 years and above it will be 4 years from the date of issue.

Investing in these bonds may be an attractive proposition for individuals in the lower income tax bracket from the point of view of locking in interest rates. But before you sign above the dotted line, consider the risk of upward movement in interest rates. Bond yields have moved up sharply in recent past. Due to expectation of higher inflation or higher fiscal deficit if the interest rates move up further, current interest rate on offer may not remain

While the interest rates on small savings schemes are revised each quarter, the banks too are frequently adjusting their fixed deposit rates to remain competitive. It makes sense to hold on till the budget announcements as the interest rates will adjust after factoring in the government spending and government borrowing plans among other things. "Investors should take cue from movement in interest rates offered on other competitive instruments before arriving at the investment decision

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