SBI Retail Bonds are the latest offering from SBI which is coming up with a bond issue that opens on 18th October and closes on 25th October. This is the second big bond issue this month with the IDFC issue still running.
A lot of people will be comparing the SBI bond issue to the IDFC one, so let me say upfront that they're quite different in one key aspect which is the tax savings. The IDFC bond issue was an infrastructure bond under Section 80CCF, and could get your taxable income reduced by up to Rs. 20,000.
The SBI retail bonds are not covered under this, so you won't get any 80CCF benefits. Now let's look at some of its main features.
Interest rate on SBI Bonds
There are two series of SBI Bonds – Series 1 Lower Tier II Bonds gets you an interest rate of 9.25%, and has a tenor of 10 years, and the Series 2 Lower Tier II Bond has an interest rate of 9.50%, and a tenor of 15 years.
This compares quite favorably to the fixed deposit rates SBI offers as the SBI fixed deposit interest rates for 5 – 8 years is 7.50%, and more than 8 years is 7.75%. These bonds are not covered under deposit insurance since they are not fixed deposits, and are not redeemable at the option of the bondholders.
There is a call option or redemption with SBI according to which they can redeem the series 1 bonds after 5 years, and series 2 bonds after 10 years. If they don't do that then the interest rate will rise by 0.50%.
Demat account is compulsory for investing in SBI Bonds
You need a demat account to invest in these SBI bonds, and your bonds will be held in dematerialized form. If you don't have a demat account and wish to invest in them then you will have to open a demat account fairly quickly.
Tax implications of the SBI Retail Bond
SBI Retail Bonds are different from the IDFC bonds in the sense that they are not covered under section 80 CCF, so there won't be any reduction from your taxable income because of investment in this bond.
The interest from these bonds will be treated as income that gets added to your other income and you will pay tax on it accordingly.
SBI Bonds to be listed on NSE
These bonds will be listed on the NSE, and as far as I could understand you will be able to freely trade the bonds even within the 5 year period. So you could hold the bond till maturity or sell it on the exchange if a market develops for it. The prospectus states that all formalities to list the bond will be completed within 30 days of date of closure, so the bonds will be listed on the exchange to buy and sell fairly soon.
When will the interest be paid on the SBI bonds?
The interest on both the series of SBI bonds will be paid out on April 2 of every year.
What is the minimum application size on the SBI bond?
The minimum amount you need to invest in these bonds is Rs. 10,000, you can subscribe in multiples of Rs. 10,000 after that.
How do these SBI Retail Bonds compare with fixed deposits?
Quite favorably because of the higher interest rate and option of listing on NSE. People are expecting these retail bonds to over-subscribe, so let's see how it goes.