Should FD investors switch to floating rate savings bonds as they offer higher interest rates than SBI, ICICI, HDFC Bank

The ultimate aim of investors is to increase their wealth, and the sooner, the better. They keep moving their money from savings accounts to liquid funds just for the sake of higher interest rates. For those who are looking for a guaranteed steady return, and don’t want to take risk, fixed deposits (FDs) are considered a safer option, although the interest rates offered by top lenders such as State Bank of India (SBI) , HDFC, ICICI , and others are not attracted enough.

RBI Floating Rate Savings Bonds 2020 (Taxable) is set to offer an interest rate of 8.05%, a significant increase from its current rate of 7.35%. The interest rate of this bond is linked to the National Savings Certificate (NSC), which has recently increased to 7.7%. According to experts, this is a better rate than some fixed deposit options.

What are Floating Rate Savings Bonds (FRSBs)?

FRSBs are interest-bearing, non-tradable bonds, issued by the central government, with a lock-in period of 7 years. The interest rate of these bonds is not fixed like usual bonds, but is floating in nature. The FRS 2020 bonds were launched on July 1, 2020

So, should FD investors switch to RBI Floating Rate Savings Bonds?

“These bonds offer fixed income investors an attractive option, especially compared to bank fixed deposits,” Amit Gupta, MD, SAG Infotech

Both RBI and NSC Floating Rate Savings Bonds are backed by the Indian government, which ensures the safety of invested funds.

Fixed Deposit vs RBI Floating Rate Savings Bonds

However, the RBI bonds have a longer lock-in period of seven years, with limited early withdrawal options for specific age groups. Interest on these bonds is paid semi-annually, providing investors with regular income.

“There is no investment ceiling for these bonds, and they can be purchased with a minimum subscription 1,000. In contrast, there is a limit to the tax-saving fixed deposits 1.5 lakh,” said Amit Gupta.

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FD vs Floating Rate Savings Bonds: Taxation rules

Although the interest earned on these bonds is taxable, income tax deduction is up to 1.5 lakh available for NSC and bank fixed deposits, making them eligible for Section 80C exemptions.

RBI Floating Rate Savings Bonds are the perfect choice for these investors

Currently, these RBI Floating Rate Savings Bonds are the perfect choice for people who want to save money for a long period and get safe and steady income, said Amit Gupta

However, people should also consider the fact that there are some risks if the interest rates change a lot and stay that way for a long time. The bonds’ higher yield, periodic interest payments, and favorable tax regime make them an attractive option for many Indian investors, Gupta added.

Until recently, these bonds were accessible only to selected branches, and other entities designated by the Reserve Bank of India. But now, retail investors can subscribe to these bonds through RBI’s Retail Direct portal, the central bank said in a circular dated October 23.

Disclaimer: The opinions and recommendations made above are the opinions of individual analysts, and not those of Mint. We encourage investors to check with certified experts before making any investment decision.

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Updated: 03 November 2023, 10:24 AM IST

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