- High returns when market yields are at 6.6 per cent
- Safer than bank deposits, NBFC deposits and debt funds despite higher yield
- Available on tap, but can be held only through a special account
- Unfriendly taxation, no indexation
Debt investors looking for a safe parking ground for their long-term money are facing a drought of good options today.
Fixed deposits with leading banks such as SBI, HDFC Bank and ICICI Bank offer measly interest rates (6.1, 6.3 and 6.4 per cent respectively) for five-year terms. AAA-rated NBFCs such as Sundaram Finance and HDFC offer 7-7.5 per cent on five-year fixed deposits. Non-convertible debentures from NBFCs offer better rates, but they carry default risks and are available only for short windows of time.
Under the circumstances, one less-known option that offers the combination of higher-than-market interest rates with complete safety of principal is the Government of India 7.75 per cent Savings (Taxable) Bonds, 2018.
Notified by the RBI in January 2018, these savings bonds are seven-year instruments backed by the Government of India. The bonds carry a 7.75 per cent per annum interest and offer both a payout and a cumulative option. If you opt for the interest payout option, it will be paid half-yearly on February 1 and August 1 every year. If you choose the cumulative option, you will receive a maturity value of Rs 1703 for every Rs 1000 invested at the end of 7 years. Both the interest and maturity amount stated here are pre-tax. The bonds carry TDS and interest payout is taxed at your income tax slab rate. In the cumulative bond, tax is deducted on the interest portion of the maturity proceeds at your slab rate.
The bonds carry a face value of Rs 100 each. The minimum application amount is Rs 1000, and there’s no maximum limit for how much you can park in these bonds. Subscription is open to individuals in single or joint capacity, individuals holding on behalf of minors and Hindu Undivided Families. The bonds are not open to NRIs. These bonds, unlike NCDs from corporates, are not listed or traded in the market. They are not transferable or eligible as collateral for loans either. All investors upto 59 years of age are locked in for 7 years. For investors in the 60-70 age bracket, the lock in is at a lower 6 years. For those in the 70-80 age bracket it is 5 years and for 80 plus investors, the lock-in is 4 years.
How to buy them
Given that these sovereign-guaranteed bonds pose stiff competition to deposits and market-linked products that offer better commissions, most banks do not try too hard to promote them to their clients. So you may need to specifically ask for them. Apart from SBI, the bonds are available for sale at 21 other banks listed in the link and the Stock Holding Corporation of India. To buy them, you may need to make a physical application via your bank branch. The application form is available in the link below.
Do note that these bonds are not held in your regular demat account like NCDs but are instead held electronically in demat form in a Bond Ledger Account opened by RBI in your name. You receive paper proof of the number of bonds allotted to you, within a few days of handing in your cheque/draft/electronic payment to the bank.
Pros and cons
On the plus side, the GOI Savings Bonds offer an opportunity to participate in high returns from a sovereign-backed security at a time when market yields on government securities have plunged far below this level. Today, 10-year g-secs in the market trade at yields of about 6.5 per cent per annum, having come off highs of 8 per cent way back in September 2018.
Even if g-sec yields climb higher from here (they are likely to over the next 1-2 years), a 7.75 per cent annual interest is a good level to lock into for seven years because 10-year g-sec rates in India have seldom stayed above 8 per cent for extended periods in the past. Given that GOI Savings Bonds are far safer than bank deposits, NBFC deposits or NBFC NCDs, they offer the unusual combination of higher returns with negligible risk.
On the minus side, the GOI Bonds, unlike listed NCDs, don’t offer any liquidity before maturity as they are neither listed nor transferable. For investors in the 20 and 30 per cent tax slabs, the taxation of returns on both the regular and cumulative bonds as interest, and not capital gains, can take a bite out of returns. Unlike, debt mutual funds, there are no indexation benefits on the gains despite the long holding. This can substantially trim returns for folks in the 20 and 30 percent brackets.
The fact that these bonds don’t show up in your regular demat account can also be a disadvantage, as there’s a risk of losing track of the holding.
Savings Bonds versus Small Savings
The only set of fixed income instruments that offer comparable risk-reward today are the small savings schemes from the Post Office, which are also sovereign-backed. So how do the GOI Savings bonds compare to long-term instruments from the India Post menu?
The GOI Savings Bonds offer slightly higher rates than the 5-year National Savings Time Deposit which offers 7.7 percent per annum currently (January 1 to March 31 2020 quarter). If you have room under section 80C though, you may prefer the National Savings Time Deposit because it offers a tax exemption on upto Rs 1.5 lakh of your principal investment under section 80C, which the GOI bond doesn’t.
The post office deposit carries a lock-in of 5 years, against 7 years on the GOI Savings bond. But on the flip side, it only offers an interest payout option and no cumulative option. If you don’t seek regular income, this denies you compounding benefits from the long holding period.
The 5-year National Savings Certificate presently offers an interest of 7.9 percent, slightly higher than the GOI Bond. NSC investments qualify for 80C benefits too. However, NSC only offers a cumulative option and no regular payout option. The Kisan Vikas Patra scheme offers rates of 7.6 per cent per annum but carries a longer lock-in of 9 years and 5 months. The scheme again offers only a cumulative option and no regular payout option.
For senior citizen investors seeking income, the Senior Citizens Savings Scheme with an 8.6 percent annual interest beats the GOI Savings Bond, given high rates, 80C benefits and early exit facility after 1 year. However, SCSS offers only a payout option and no cumulative option. More importantly, it caps the total investment that one can make at Rs 15 lakh over a lifetime, while the GOI Bonds accept unlimited amounts.
Overall, the GOI Savings Bond is great for the following categories of investors.
- Investors seeking higher returns than bank deposits, who can lock in for 7 years
- Investors looking for a non-market linked option for fixed income allocations in their portfolio
- Those seeking to invest a windfall in a guaranteed return instrument that will protect capital
- VRS optees below the age of 60 looking for safe options to park retirement proceeds/earn income
- Senior citizens who have already invested the maximum limit of Rs 15 lakh each in SCSS and PM Vaya Vandana Yojana and have surpluses to deploy.
- Investors seeking regular income who have exhausted post office options like the National Savings Time Deposits and the Monthly Income Account.