RBI's Savings Bond a good investment option for risk-averse investors

Go for half-yearly payouts if you seek regular income

With interest rates coming down on most debt instruments, only a few are giving good returns. The Reserve Bank of India’s (RBI’s) Savings Bond is one of them. A fall in retail domestic term deposit rates is discernible across all tenors above one year and till 10 years. Currently, the SBI fixed deposit rate is 6.10 per cent for tenors in the range of 5 to 10 years while it is 6.60 per cent for senior citizens.

In comparison, RBI Savings Bonds carry a coupon rate of 7.75 per cent compounded/payable half-yearly. "RBI bonds score over bank FDs on return. Their appeal becomes even more pronounced when the yield curve is downward sloping,” says Rajiv Bajaj, chairman and MD, Bajaj Capital. 

The stipulated lock-in is seven years while for senior citizens it is lower. The minimum investment is Rs 1,000 and there is no maximum limit on investment. 

“At present, the interest rate is low on most savings instruments like fixed deposit, National Savings Certificate, Postal Deposits, etc. Interest rates will likely move southward for some time. In such a situation, RBI bonds is attractive for investors. The interest payable on a half-yearly basis takes the yield to 7.9 per cent,” says S Sridharan, head, financial Planning, Wealth Ladder Investment Advisors.

However, these bonds are taxable in the investor’s hands. He has to pay tax on the marginal rate of tax. Also, a 10 per cent tax is deductible at source if the interest income from these saving bonds exceeds Rs 10,000 in a year. “In case of the non-cumulative option, the TDS is levied at the time of making payment to investors. In case of the cumulative option, TDS is levied on the interest portion at the time of payment of maturity proceeds. No TDS will, however, be levied on exempted investors. They are exempt from wealth tax too,” says Bajaj.

Though these bonds score on returns and safety, a drawback of RBI bonds is that they lack liquidity. “The RBI bonds have a lock-in of seven years, and there is no way an investor can exit. They are also not transferable. If some­one needs liquidity within seven years, he should skip this product,” says Sridharan.

Premature encashment is allowed for investors of 60 years and above, subject to the minimum lock-in period. For investors in the age group of 60-70 years, the minimum lock-in is six years, for 70-80 years it is five years, while it is four years for investors of age 80 years and above.

While RBI bonds are a good investment option for the risk-averse, they are ideally suited for senior citizens. “RBI Bonds are a good investment option for a conservative investor seeking stable returns along with safety of capital. This is particularly true of senior citizens who tend to be risk-averse. They normally prefer assets that are immune to market gyrations. For investors who want a regular income, non- cumulative option is a prudent choice. If someone prefers the cumulative option and does not need a regular income, he can opt for these bonds after exhausting his Section 80C limit,” says Bajaj.