RBI Tax Saving Bonds: Features, Risk & Returns of RBI Tax Saving Bonds

What are Tax Saving Bonds?

Tax-saving bonds are financial instruments issued by government entities or public sector companies in order to mobilize funds from the general public for specific purposes. These bonds are designed to provide tax benefits to investors while encouraging savings and investment in the economy.

Tax-saving bonds typically offer tax exemptions or deductions on the interest earned or the investment made in these bonds. The funds raised through tax-saving bonds are usually utilized for specific developmental or infrastructure projects initiated by the government. These projects can include areas like power, roads, railways, irrigation, housing, and more.

Investing in tax-free bonds allows you to enjoy the following features:

• Interest payouts are on an annual basis, and you do not have to pay tax on the same.
• The investment tenure ranges from 10 to 20 years, depending on your requirements.
• You can trade the bonds at any time according to the market rate. However, the profit earned will be subject to taxation under the Income Tax Act.
• You can hold the bonds in a physical or dematerialized form.

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What is an RBI Bond?

The Reserve Bank of India issues RBI bonds on behalf of the Indian government, offering a secure investment avenue for citizens. Among these bonds is the Government of India Savings (Taxable) Bond, which helps the government raise funds for its various projects and initiatives. This bond is accessible by individuals (including Joint Holdings) and Hindu Undivided Families. NRIs are not eligible for making investments in these Bonds.

The interest on RBI bonds is paid semi-annually on January 1st and July 1st. RBI Bonds are considered a safe investment and help you earn more interest.At present, RBI bonds provide an interest rate of 8.5 per cent.

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Features of RBI Bonds

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What is RBI 7.75% Saving Bond?

RBI 7.75% Savings Bonds represent a low-risk investment option suitable for novice investors or those seeking consistent, stable returns while avoiding significant risk exposure. The government has outlined the eligible individuals permitted to invest in these bonds through an official notification. However, as of the latest information available, these bonds are discontinued to be issued. If you want an alternative option to make investments in such bonds, you can consult our financial advisors here.

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Eligibility to Invest in RBI Bonds

According to the notification, the following entities are allowed to hold the bonds:

• An individual who is not a Non-Resident Indian (i.e., they must be a citizen of India):
  1. In an individual capacity;
  2. In an individual capacity on a Joint Basis;
  3. In an individual capacity on anyone or survivor basis - wherein the event of death, the bond can be sold back to the original issuer;
  4. On behalf of a minor by the father/mother/legal guardian;
• A Hindu Undivided Family;
• A “Charitable Institution” registered under the 25th Section of the Indian Companies Act of 1956;
• An institution which has obtained a Certificate of Registration as a charitable institution in accordance with a law in force in the Republic of India;
• Any institution which has obtained a certificate from the Income Tax Authority for the purposes of Section 80G of the Income Tax Act of 1961;
• A “University”, meaning a university which has been established or incorporated under a Central, State or Provincial Act, and includes an Institution declared under Section 3 of the University Grants Commission Act of 1956, to be a University for the purposes of that Act.

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Benefits of Investing in RBI Tax Savings Bond

Safety: RBI Tax Savings Bonds are backed by the Indian government, which makes them one of the safest investment options available. They are considered risk-free as they are not subject to market fluctuations.

Assured Returns: The bond offers fixed interest rates, providing investors with assured returns throughout the bond's tenure. This can be attractive to risk-averse investors who prefer predictability.

Tax Benefits: Investments in RBI Tax Savings Bonds are eligible for tax deductions under Section 80C of the Income Tax Act up to a specified limit. This makes them a popular choice for individuals looking to reduce their taxable income.

Liquidity: Although these bonds have a lock-in period, they offer relatively better liquidity compared to certain other tax-saving investments like the Public Provident Fund (PPF) or National Savings Certificate (NSC). Investors can redeem the bonds prematurely under certain conditions.

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Documents Required to Invest in RBI Tax Savings Bonds

1. KYC Documents: You will need to complete the Know Your Customer (KYC) process, which involves providing identity and address proof documents. The following are commonly accepted documents:
   1. Aadhaar card
   2. Passport
   3. Voter ID card
   4. Driving license
   5. PAN card (Permanent Account Number)
   6. Utility bills (electricity, water, gas, etc.) as address proof
   7. Bank account statement or passbook
   8. Passport-sized photographs
2. Eligibility Criteria:
   
   1. Individuals: Resident individuals are eligible to invest in RBI Tax Savings Bonds. HUFs (Hindu Undivided Families), NRIs (Non-Resident Indians), and other entities are not eligible.
3. Application Form: You will need to fill out the application form for RBI Tax Savings Bonds, which is available at designated bank branches or post offices where the bonds are sold. The form may require you to provide personal information, such as your name, address, PAN number, and contact details.
4. Proof of Age: Depending on the bond series and your age, you may be required to provide proof of your age, such as a birth certificate or any government-issued document that includes your date of birth.
5. Payment: You'll need to provide the funds for your investment in the form of a cheque or demand draft drawn in favor of the "Receiving Office" where you are applying for the bond. Cash payments are typically not accepted.
6. Nomination: You have the option to nominate a person who will receive the bond proceeds in case of your demise. If you wish to nominate someone, you will need to provide the nominee's details and relationship.
7. Form 15H/15G: If you are eligible and wish to avoid tax deduction at source (TDS) on the interest income earned from the bond, you may need to submit Form 15H (for senior citizens) or Form 15G (for individuals below the taxable income threshold) along with your application.
8. Compliance with Limits: Ensure that you do not exceed the maximum investment limit specified by the RBI.

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Can I Nominate Someone to Hold the Bonds in Case of Death?

It must also be noted that a sole existing holder, i.e., an individual person who holds the bonds, may nominate another person or persons in the event of their death who shall be entitled to the ownership as well as any payment due on the bond. This must be done through the form “B” of the 7.75% 7-year taxable bond.,

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What is the Issue Price and Maximum Investment Limit?

The bonds will be issued at par or at 100%, i.e., the amount of the bond will be for exactly the amount that has been paid. The bonds will be issued at a minimum of 1000 INR and multiples thereof. Hence, the minimum investment limit is 1000 INR, while there is no maximum limit on investment.

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How can I Buy the Bonds and in What Form will they Exist?

The bonds can be bought through the cheques/cash/Drafts. The bonds have been issued since April 1st, 2003, and will be issued till further notice from the Government via a notification.

The bonds will be held in the credit of the holder in the Bond Ledger Account. A new Bond Ledger series with the prefix (TB) will be opened in the name of the issuer of the bonds.

In case an entity already has a Bond Ledger Account, all new issues of the 7.75% (taxable) six-year bonds will be seen as a new investment under the Bond Ledger Account.

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Who Will Issue the Bonds and Where Will they be Available?

The Bonds, in the form of the Bond Ledger Account, as described above, will be issued by and held with designated branches of the agency banks and Stock Holding Corporation of India Limited (SHCIL) as authorized by the Reserve Bank of India. These include:

• All SHCIL offices,
• Specific branches of the State Bank of India,
• All other nationalized banks, and
• certain other private sector banks, such as ICICI Bank and HDFC Bank.

It is important to note that these bonds cannot be bought on the Stock Exchange as a tradable commodity.

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What Specific Forms Need to be Filled for Issuing the Bond?

The Certificate of Holding, which proves that an entity owns the bonds, will be issued in Form TBX and Form TBY as applicable for cumulative and non-cumulative investments, respectively. The date of issue of the Bond will be according to either the date of realization of the subscription cheque or draft or the date of subscription via cash.

Applications for the bond can be made by filling out form “A”, stating clearly:

• The full amount,
• The full name, and
• The address of the applicant.

The applications must be submitted with the necessary payment in the form of cash/cheque/draft.

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How will the Bonds be Taxed?

1. Income Tax - 7.75% six-year bonds shall be taxable under the Income Tax Act of 1961 and in accordance to the relevant taxation income level of the bondholder.
2. Wealth Tax - The bond shall be exempt from wealth tax in accordance with the Wealth Tax Act of 1957.

All applicants who have a certificate that exempts them from paying tax under the relevant sections or provisions of the Income Tax Act of 1962 must make a declaration regarding the same in Form “A.” They must also submit a true copy of the certificate exempting them from the tax as issued by the Income Tax Authorities.

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Can I Transfer the Bonds Once I have Bought them?

While individuals can nominate others to whom the ownership of the bond will pass in case of death, they cannot be transferred to another entity while the bondholder is alive. This is because the bond is not a tradable commodity or security which can be bought or sold in the stock market. This also means that the bond cannot be used as collateral in Banks, financial institutions, or Non-Banking Financial Companies (NBFCs).

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How is the Interest on the Bond Calculated?

• The bondholder can take interest in either cumulative or non-cumulative forms on the bond.
• The bond will bear an interest rate of 7.75% per annum.
• Interest on non-cumulative bonds will be payable at an interval of 6 monthly intervals from the date of issue. The issue date is determined by the day the bond is paid for, as mentioned above. The first payment of interest on the bonds shall be paid by 31st July or 31st January, as in accordance with the date of issue, and thereafter on either 1st February or 1st August, as according to the date of issue.
• In the case of cumulative bonds, the interest will be compounded every 6 months and will be payable at the bond’s maturity, along with the principal. In this case, the amount due and payable at the end of the 7 years will be 1703 INR, including both interest and principal, for every 1000 INR investment into the bond.

It must be noted that the bond will reach its maturity at the end of 7 years. No interest will accrue on the bond post its maturity date.

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What is the Rate of the Brokerage on this Bond?

The government has decided to provide a brokerage fee of INR 1.00 (one Rupee) for every 100 INR to all brokers.

This includes PPF and UTI agents who are registered with the offices or banks that have been authorized to issue these bonds as well as the Receiving Offices, as has been mentioned above, by the Reserve Bank of India.

The brokerage fees will be paid for by the Central Accounts Section of the Reserve Bank of India, located in Nagpur.

Handling and service charges will be paid for by the Public Debt Office of the Reserve Bank of India.

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Differences Between Tax Saving Bonds & Tax-Free Bonds

Tax Saving Bonds and Tax-Free Bonds are two different types of financial instruments that offer tax benefits to investors, but they have distinct characteristics:

Purpose:

• Tax Saving Bonds: These bonds are issued with the objective of encouraging savings and investment by providing tax deductions or exemptions on the investment or interest earned. The funds raised through tax-saving bonds are typically used for specific developmental or infrastructure projects.
• Tax-Free Bonds: These bonds are issued with the purpose of attracting investors by providing tax-free interest income. The interest earned on tax-free bonds is not subject to income tax, providing a higher post-tax return to investors.

Tax Benefits:

• Tax Saving Bonds: Investors in tax-saving bonds can avail tax deductions or exemptions on the amount invested in the bonds or on the interest earned. The specific tax benefits depend on the tax laws of the country.
• Tax-Free Bonds: Investors in tax-free bonds do not have to pay income tax on the interest earned from these bonds. The interest income is completely tax-free, which can be advantageous for individuals in higher tax brackets.

Lock-in Period:

• Tax-Saving Bonds: Tax-saving bonds often have a lock-in period, during which the investor cannot sell or redeem the bonds. The lock-in period can range from a few years to the entire tenure of the bond, as specified by the issuing entity.
• Tax-Free Bonds: Tax-free bonds may or may not have a lock-in period. Some tax-free bonds may have a lock-in period, restricting the investor's ability to sell or redeem the bonds before a certain period, while others may offer liquidity and can be freely traded in the market.

Investment Limitations:

• Tax Saving Bonds: There is usually a maximum limit on the amount that can be invested in tax-saving bonds to avail the tax benefits. This limit is determined by the government or the issuing entity.
• Tax-Free Bonds: Tax-free bonds may or may not have specific investment limitations. The investor can typically invest any amount in tax-free bonds, subject to the availability of the bonds in the market.

Issuers:

• Tax-Saving Bonds: Tax-saving bonds are usually issued by government entities or public sector companies.
• Tax-Free Bonds: Tax-free bonds can be issued by government entities, public sector companies, or private corporations.

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