The government of India’s savings bond also known as the RBI bond comes with an interest rate of 7.75%, a term of 7 years, and is open to Indian citizens only. The interest rates are computed annually but payable on a half-yearly basis and are taxable. The scheme has attracted retail investors like senior citizens and retired investors, as it offers the safety of principal, a regular income, and no default risk.
The government has reduced rates on most of its small savings schemes, including the Public Provident Fund (PPF), Senior Citizen Savings Scheme (SCSS), post office fixed deposits and the repo rate has also been hitting an all-time low of 4.40%. This led to an increase in demand for RBI bonds and it rather seemed like a costly borrowing for the government. With the downfall of interest rates, the government announced that it has stopped issuing these savings bonds. However, there are a few alternatives available;
National Savings Certificate and Kisan Vikas Patra
National Savings Certificates (NSCs) and Kisan Vikas Patras (KVPs) are both issued by the government and can be purchased from banks and post offices across the country. NSCs have an interest rate of 6.8% and a five-year tenor, and KVPs have a rate of 6.9% and a tenor of 10 years and four months.
In the case of NSCs, both the principal amount and interest are entitled to tax deduction up to Rs 1.5 lakh per annum and for KVPs the interest is taxable at slab rate. The interest is paid on maturity and not monthly.
Corporate Fixed Deposits
Companies issue fixed deposits (FDs) through the company’s website and they bear a higher risk of default. Corporate FDs are rated, and hence you can choose an AAA-rated corporate FD from a highly reputed company to reduce risk. The interest in corporate FDs is fully taxable at the slab rate.
For instance, HDFC Ltd holds 6.93% on a 15-month FD, Bajaj Finserv offers 7.4% on FDs of 2years, ICICI Home Finance offers 7% on FDs of 1-2 years.
Listed bonds
Bonds are issued by both public and private sectors, which are available on the stock exchanges.
Public sector bonds currently trade at returns of 5-6% and some financial institutions also sell tax-free bonds on the over the counter on the secondary markets. However, the pandemic induced lockdowns have dwindled the balance sheets of major companies.
In particular, the perpetual bonds issued by both private and public sector banks that are currently trading in the market at high yields, these bear an extremely high level of risk. Interest on these bonds is taxable at a slab rate, although you can sell them before maturity. They can be traded through stockbrokers through a Demat account.
Sukanya Samridhi Scheme
This scheme is intended for parents with a girl child and can be opened in any post office across India and few authorized commercial banks. The interest rate is set at 7.6% for FY 2020-21 with a term of 21 years. It has an upper limit of investment 1.5 lakh per year and the tax benefits are similar to that of public provident fund (PPF) and have an upper limit of investment is 1.5 lakh per year.
