Goverment of India has been revised the structure of bonds in January, 2018. The important features of the bonds are detailed below:
1) Eligibility : Only Individual and Hindu Undivided Family (HUF) are allowed to invest in this bonds. Non-Resident Indians (NRIs) are not allowed to invest. One can invest in individual calpacity or joint or jointly or either-survivor basis or on behalf of minor capacity as father/mother/legal guardian.
2) Investment Features:
- There is no maximum investment limit.
- The bond will be issued at par at Rs. 100. The bond will be issued for minimum amount of Rs. 1000 face value and multiple of there of.
- 7 years tenure of the bond from the date of issue.
- Interest should be half yearly or cumulative interest.
- 7.75 p.a interest. Interest to the holders opting for non-cumulative Bonds will be paid from date of issue in terms of paragraph 7 above up to 31st July / 31st January as the case may be, and thereafter half-yearly for period ending 31st July and 31st January on 1st August and 1st February.
- There is no tax exemptions as this is a taxable bonds but the Bonds will be exempt from wealth-tax under the Wealth Tax Act, 1957.
- The Bonds held to the credit of Bonds Ledger Account of an investor shall not be transferable.
3) How to subcribe? : Subcription to the bond wil be in the form of Cash/ Draftss/ Cheaques or any other electronic mode accepted by receving office. One can subcribe bonds through any nationalised bank, three private banks i.s HDFC Banks, ICICI Banks and Axis Bank braches or through stock holding corporation of india (SHCIL). The bond will issue in demate form and credited to Bond Ledger Account (BLA) subject to realisation of the funds.
4) Effects of Tax Deduction at Source (TDS):
- Tax will be deducted at source while making payment of interest on the Non-Cumulative Bonds from time to time and credited to Government Account.
- Tax on the interest portion of the maturity value will be deducted at source at the time of payment of the maturity proceeds on the Cumulative Bonds and credited to Government Account. Provided that tax will not be deducted while making payment of interest/ maturity proceeds, as the case may be, to individual/s who have made a declaration in the application form that they have obtained exemption from tax under the relevant provisions of the Income Tax Act, 1961 and have submitted a true copy of the certificate obtained from Income Tax Authorities.
5) Lock in and maturity repayments:
- The Bonds shall be repayable on the expiration of 7 years from the date of issue.
- Premature encashment in respect of the Bonds shall be allowed for individual investors in the age group of 60 years and above, subject to submission of document relating to date of birth of the investor in support of age to the satisfaction of the issuing bank, after minimum lock in period from the date of issue as indicated below:
- Lock in period for investors in the age bracket of 60 to 70 years shall be 6 years from the date of issue.
- Lock in period for investors in the age bracket of 70 to 80 years shall be 5 years from the date of issue.
- Lock in period for investors in the age of 80 years and above shall be 4 years from the date of issue.
- In case of joint holders or more than two holders of the Bond, the above lock in period will be applicable even if any one of the holders fulfills the above conditions of eligibility.
- After aforesaid minimum lock in period from the date of issue an eligible investor can surrender the bonds at any time after the 12th, 10th and 8th half year corresponding to the respective lock in period but redemption payment will be made on the following interest payment due date. Thus, the effective date of premature encashment for eligible investors will be 1st August and 1st February every year. However, 50% of interest due and payable for the last six months of the holding period will be recovered in such cases, both in respect of Cumulative and Non-cumulative bonds.
6) Nomination: A sole holder or all the joint holders (investors) of a Bond, being individual/s, may nominate in Form B. Where the nomination has been made in favour of two or more nominees and either or any of them dies before such payment becomes due, the title to the Bonds shall vest in the surviving nominee or nominees and the amount being due thereon shall be paid accordingly.
This RBI bonds gives fixed interest income and suitable for conservative investor who needs fix return. However, it comes with some drawbacks. Investor does not get any tax benefits for investing in them. Neither the investment fetches tax deduction nor the interest earned is tax-free. Investor 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.
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. 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. One should look the rise in bond yields due to expecation of increase in fiscal deficit and inflation. If someone look forward to hold this funds till maturity, there are other investment options to get better yields.
Note: This product note is for knowledge purpose only. This is not any recommendations or advise to invest in this product.