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

Updated on: 23 May, 2024 05:18 PM

From time to time, the Government of India issues bonds to fund programs of public welfare, increase investment in the economy, and help the country's citizens take part in the nation's growth. Savings bonds are usually considered safe and secure investments as the national government backs their returns. Such bonds also showcase citizens' faith in their government, their country’s future, and the nature of the economy. In the past, the government has issued several kinds of different savings bonds. Saving bonds usually have an average rate of return on investment. This article explores the various aspects of one such bond called 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.

Features of RBI Bonds

Item Details Remarks
1. Eligibility for Investment The Bonds may be held by -
(i) a person resident in India,
(a) in her or his individual capacity, or
(b) in individual capacity on a joint basis, or
(c) in individual capacity on any one or survivor basis, or
(d) on behalf of a minor as father/mother/legal guardian
(ii) a Hindu Undivided Family
Non-Resident Indians (NRI)s are not eligible to invest in these bonds.
2. Form of the Bonds Electronic form held in the Bond Ledger Account. Bond Ledger Account will be opened by the Receiving Office in the name of investor/s.
3. Maturity period 7 years from the date of issuance. ---
4. Period The Bonds shall be repayable on the expiration of 7 (Seven) years from the date of issue. Premature redemption shall be allowed for specified categories of senior citizens. The Bonds shall be fully repayable upon expiration i.e. after 7 (Seven) years from the date of issue. Premature redemption shall only be allowed for specified categories of senior citizens.
5. Limit of investment Minimum ₹ 1000/- and in multiples of ₹ 1000/-. No maximum limit.
6. Floating Interest Rate & Reset Criteria (i) Interest is payable semi-annually from the date of issue of bonds, up to 30th June / 31st December as the case may be, and thereafter half-yearly for the period ending 30th June and 31st December on 1st July and 1st January respectively.
(ii) The coupon rate payable for the next half-year would be reset on 1st January 2021 and thereafter, every 1st July and 1st January.
The coupon/interest of the bond will be reset half-yearly based on the National Savings Certificate (NSC) rate (Base rate) + 35bps.
Half-yearly interest is payable on 1st January / 1st July.
The coupon on 1st January 2021 shall be paid at 7.15%.
7. Tax treatment Income from the bonds is taxable. Tax will be deducted at source while interest is paid.
If an exemption under the relevant provisions of the Income Tax Act,1961, is obtained, it may be declared in the Application Form.
8. Transferability The bonds are not transferable. Transferability is limited to nominee(s)/legal heir in case of the death of the holder.
9. Tradability /Advances The bonds are not tradable in the secondary market and also not eligible as collateral for availing loans. ---
10. Nomination: A sole holder or a sole surviving holder a Bond, being an individual, can make a nomination. ---
11. Date of Issue of Bonds Date of receipt of subscription in cash (up to `20,000/- only), or date of realization of cheque /draft/ funds. ---
12. Premature redemption Facility is available to eligible investors after Lock in period of 4, 5, and 6 years in the age bracket of 80 years and above, between 70 to 80 years and 60 to 70 years, respectively Penalty charges @ 50% of last coupon payment.
13. Nomination Facility The sole Holder or all the joint holders may nominate one or more persons as nominees in accordance with the provisions of the Government Securities Act, 2006 (38 of 2006) and the Government Securities Regulation, 2007, published in Part III, Section 4 of the Gazette of India dated December 1, 2007. ---
14. Bank account It is mandatory for the investor/s to provide bank account details to facilitate payment of interest /maturity value directly to his/her/their bank account.

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.


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.

Pros of 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.


Cons of RBI Tax Savings Bond:

Lower Returns: The interest rates offered on RBI Tax Savings Bonds are typically lower than what you might earn from other investment options like equities or mutual funds. This means your returns may not keep pace with inflation.

Lock-in Period: These bonds come with a lock-in period, which means your investment is tied up for a specified duration. Premature withdrawals are allowed under specific conditions, but they may result in a reduced interest rate.

Interest Taxation: While the investment in these bonds is tax-deductible under Section 80C, the interest earned is taxable. This can reduce the effective returns, especially for individuals in higher tax brackets.

Fixed Returns: The fixed interest rates mean that you won't benefit from any increase in interest rates during the bond's tenure. If interest rates in the broader economy rise significantly, you may miss out on potentially higher returns from other investments.

Limited Flexibility: Once you invest in these bonds, you have limited flexibility to make changes or switch to a different one.


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.

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.,


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.


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.


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.


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.


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.


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).


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.


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.


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.

Want to know about more tax-saving investment options? Read Here

Looking for more tax-saving bonds and schemes while knowing their tax implication, our tax professionals are experts in maximizing tax refunds. Since the e filing of income tax return has already been started, don’t wait for the last date to file ITR. Book eCA Today!


Frequently Asked Questions

Q- Is interest on GOI bonds taxable?

An available option of getting the interest on these bonds paid is digitally through credit to the bank account of the holder which is held to the credit of the BLA. The interest earned under the bonds - '7.75% Savings (Taxable) Bonds, 2018' is taxable under the Income Tax Act, 1961.


Q- What do tax-free bonds pay?

The rates on bond interest payments are taxed as ordinary income however they can go as high as 35% which automatically is double the maximum 15% levy on stock dividends. The municipal bonds can be bought without any federal taxes on the interest which is not bound to be paid. Further, if the bonds are bought from in-state issuers, then state and local taxes can also be avoided.


Q- How do tax-free bonds work?

Tax-free bonds such as municipal bonds generate income which is tax-free and thus result in the paying of lower interest rates than taxable bonds. A fixed rate of interest is supposed to be paid for most of the municipal bonds. Therefore, investors can benefit from the higher yield which is available through the taxable bonds as they anticipate a remarkable drop in the marginal income tax rate.


Q- How much interest do municipal bonds pay?

The interest which one can gain through the municipal bonds varies from the corporate bonds. The percentage for municipal bonds is 5% whereas corporate bonds is 7%. This results in the generation of $35,000 from corporate bonds in the form of interest income each year. This income can be benefited for living, paying bills, food and health charges. Ordinary income taxes which have to be paid on this money.


Q- What are the best tax-free investments?

The Top 8 Tax-Free Investments Everybody Should Consider

  • 401(k)/403(b) Employer-Sponsored Retirement Plan.
  • Traditional IRA/Roth IRA.
  • Health Savings Account (HSA)
  • Municipal Bonds
  • Tax-free Exchange Traded Funds (ETF)
  • 529 Education Fund.
  • U.S. Series I Savings Bond.
  • Charitable Donations/Gifting.

CA Abhishek Soni
CA Abhishek Soni

Abhishek Soni is a Chartered Accountant by profession & entrepreneur by passion. He is the co-founder & CEO of Tax2Win.in. Tax2win is amongst the top 25 emerging startups of Asia and authorized ERI by the Income Tax Department. In the past, he worked in EY and comes with wide industry experience from telecom, retail to manufacturing to entertainment where he has handled various national and international assignments.