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For those who were disappointed with the government closing subscription of its 8 per cent (taxable) savings bonds, there’s some good news. Subhash Chandra, Secretary of Department of Economic Affairs, Ministry of Finance, has tweeted that the scheme the bonds will be replaced with another one that would bear 7.75 per cent interest rate.
The relaunching of the Government of India bonds with the lower interest rate is in tandem with the recent move of the Finance Ministry, which also revised the interest rates on Post Office Savings Schemes. For retail investors and retirees, the bonds will continue to be lucrative even though the interest rate will be 25 basis points lower. At 7.75 per cent interest, the instrument has the highest returns when compared to other fixed-income products.
In Post Office Savings Schemes, if one looks at taxable products available to all citizens, the five-year fixed deposit has the highest interest rate at 7.6 per cent. It is followed by Monthly Income Scheme that offers 7.5 per cent. When compared to fixed deposits, an investor gets 6.25 per cent returns on State Bank of India’s fixed deposit of 46 days to two years.
Those in the 30 per cent tax bracket would still make 5.42 per cent returns by investing in the new bonds that the government would issue. If an investor is in 20 per cent and 10 per cent tax bracket, he will make 6.2 per cent and almost 7 per cent post-tax returns respectively.
For those who are not in the highest tax bracket, the returns are slightly better than what they can get in a debt fund, which carries either duration or interest rate risk. These bonds have the highest safety level as they are backed by the sovereign guarantee. The average one-year return from shorter duration debt funds is in the range of 6.4-6.6 per cent before tax.
8% Savings Bonds Scheme, also known as RBI Bonds Scheme, is not being closed. 8% Scheme is being replaced by 7.75% Savings Bonds Scheme.— Subhash Chandra Garg (@SecretaryDEA) January 2, 2018
The government had come out with bonds offering in 2003 by offering an interest rate of 8 per cent. The Government of India bond had a fixed tenure of six years and there was no limit on the funds an individual can invest in these.
The only other comparable instruments with GoI bonds are tax-free bonds that were issued by public sector undertakings (PSU) around two years back. But investors would need to hunt for these bonds in the secondary market on the stock exchanges. But the secondary market for bonds is illiquid and the trading is not frequent. The sellers also ask for a much higher price. Investors also need to have a demat account to buy tax-free bonds.