The Govt. of India announced 7.75% Savings (Taxable Bonds), 2018 recently.
Let’s understand the salient features of these bonds and whether you should consider investing in these bonds.
Firstly, these are not new bonds. The Govt. withdrew 8% taxable bonds (2003) recently and has introduced these new 7.75% taxable bonds, 2018 in its place. The earlier bonds had a maturity of 6 years. The new bonds mature in 7 years.
Here is an infographic released by Ministry of Finance about these bonds.
Almost, all the information about the bonds is available in the above infographic. There are still a few points that I should mention.
Government of India 7.75% Savings (Taxable) Bonds, 2018: Points to Note
- Maturity: These Government of India Bonds will mature in 7 years.
- Rate of Interest: The rate of interest of 7.75%, payable semi-annually.
- The bonds are available in both cumulative and non-cumulative mode.
- Who can invest? Individuals and Hindu Undivided Family (HUF) can invest in such bonds.
- NRIs cannot invest in these bonds.
- Maximum Investment: There is no maximum limit on investment in these bonds.
- Taxability of Interest Income: The interest income from such bonds will be taxed at your income tax slab rate.
- Tax Benefit on Investment: You do not get any tax benefit for investing in these bonds.
- The Bonds are exempt from Wealth Tax.
- Pre-mature exit before maturity: You will not be able to exit these bonds before maturity. There is no option of exit in the secondary market either. Therefore, if you foresee the need for such funds in the next few years, don’t invest in these bonds.
- These bonds are not eligible as collateral for loans from banks or NBFCs either.
- No credit risk (unless you believe the Government of India can default on rupee-denominated debt.
- How to Invest: You can invest through select bank branches or through websites of leading brokers.
These bonds are available on tap until further notice i.e. you can invest whenever you want to.
If you invest Rs 1 lac in Government of India 7.75% Savings (Taxable) Bonds, 2018
Under non-cumulative mode, you will get Rs 3,875 every six months for 7 years. At the time of maturity, you will get your principal back.
Under cumulative mode, you will not get anything till maturity. At the time of maturity (7 years), you will get Rs 1.7 lacs back. Effective pre-tax yield is 7.9% p.a.
Please understand I have not considered the impact of taxes while calculating the above numbers i.e. these are pre-tax numbers.
Should you invest in Government of India 7.75% Savings (Taxable) Bonds, 2018?
Since the interest is taxable, there is no need to invest in such bonds unless you are looking for regular income.
Under non-cumulative mode, for an investor in the 30% tax bracket, the post-tax yield falls to about 5.5% p.a.
Therefore, if you are young, have many years before retirement, do not need a regular income and already have taxable income, the guaranteed post-tax return of 5.5%-7% p.a. is simply not good enough for a medium-term investment.
Now, we need to see if these bonds make good sense for retirees or senior citizens. For this, we need to compare against some of the other income options for retirement.
Pradhan Mantri Vandana Vyaya Yojana (PMVVY) gives you 8% (taxable) for 10 years.
Senior Citizens Savings Scheme (SCSS) is currently offering 8.3% p.a. (as on January 5, 2018) for 5 years.
Clearly, 7.75% Savings Bonds do not fare well in terms of returns.
However, there are limits on how much you can invest under PMVVY (Rs 7.5 lacs) and SCSS (Rs 15 lacs). There is no such limit for Govt. of India 7.75% Savings Bonds. You can invest as much as you want. This is one good thing about these bonds.
At the same time, you can invest unlimited amounts in bank fixed deposits too. As a senior citizen, you may be eligible for better rates too. There are other ways to generate income during retirement too. For instance, good credit quality corporate FDs/NCDs may offer good rates (although that comes at a higher risk of default). There is also an option to go for Systematic Withdrawal Plans from right kind of debt funds for tax-efficient returns.
You need to see if you would prefer buying into these savings bonds to eliminate any credit risk.
Do note, by investing in these bonds, you are locking in interest rate only for the next 7 years (not for your entire life).
Another point to note is that there is no way you can exit these bonds before maturity (7 years). You can’t access these your investment even in case of an emergency. Other income options have some way out, albeit at a penalty. This is a big drawback.
What will you do? Do you plan to invest in Govt. of India savings bonds?
Would love to hear your views in the comments section.
Kirti Kumar.A.Sheth. says
January 6, 2018 at 3:24 pmI am an senior citizen, retired recently. Yes, I do agree that these bonds are not a good source for investment considering the tax levied. There are better investments like dividend paying companies which are non taxable, provided we are prepared to take a calculated risk.
Deepesh Raghaw says
January 7, 2018 at 7:06 pmThanks Sir for your inputs.
Vaibav says
January 13, 2018 at 1:26 amHello sir, I want to ask I invested in RBI 2003 savings (taxable) Bonds! last year to keep yearly interest just below ₹10000/- so as to avoid 15 G form!……. Now if again i am investing in newly launched 2018 (taxable) 7.75% bonds will there be ₹10000 limit for me or Not? …….. or they will combine both Intrests together ?Thanks
Deepesh Raghaw says
January 14, 2018 at 5:30 pmHi Vaibhav,
I am not too sure of this.
In my opinion, the limits will be combined.
Anonymous says
January 15, 2018 at 10:24 pmThanks
Vaibav says
January 15, 2018 at 10:24 pmThanks
Pawan Narang says
January 25, 2018 at 1:19 pmHow can we do investment in these bonds?
Rakesh Kumar Chaudhry says
January 31, 2018 at 1:21 pmBanks like ICICI ,
HDFC are accepting these deposits.
If you have a Demat a/c with ICICI Bank, these bonds can be purchased on- line also.
Deepesh Raghaw says
January 31, 2018 at 2:40 pmyou can invest from your bank branch. Several broker website also offer this serive.
John says
February 1, 2018 at 4:05 pmWon’t brokers charge a commission?
Will one have to pay tax every year on the interest generated for the year (like for bank FDs) or is tax paid on the cumulative interest in the 7th year?
Thanks.
Deepesh Raghaw says
February 1, 2018 at 6:13 pmThe commission is in-built. You don’t have to pay anything.
Depends on how you report income. You can file every year or in the year of receipt.
If you file in the year of maturity, it might increase the marginal tax rate.
Pradip B.Gupte says
February 6, 2018 at 7:32 pmPlease explain why short term Gilt fund of any Mutual Fund fare better(More CAGR) than Gilt Long term fund
Both have portfolio of sovereign bonds
Deepesh Raghaw says
February 7, 2018 at 5:08 pmHi Pradip,
That’s not the case always.
In a rising interest rate regime, you can expect short-term gilt to perform better.
In a falling interest rate regime, long-term gilt funds are likely to do better.
Paatch says
February 26, 2018 at 1:07 amThanks Deepesh for the clear explanantion
Deepesh Raghaw says
February 27, 2018 at 12:15 pmYou are welcome, Paatch.
Naveen Sharma says
May 23, 2018 at 2:08 amHi,
I wish to know if I invest 20 lac in GOzi bond and my income from other sources is zero then if Ideposit 15 G form every year then will I still be charged for tax!
Deepesh Raghaw says
May 24, 2018 at 7:26 pmNo
Bharat says
June 8, 2018 at 4:15 pmSir,
I am retiree.I have invested. in 8%/7.75% taxable GOI Bonds Cumulative scheme.Since I am reporting bank interest on accrual basis I requested HDFC Bank for TDS certificate for accrued interest on GOI Bonds.The bank stated that TDS certificate will be issued on maturity and no interest certificate can be issued for yearly interest.
Should I have to calculate yearly interest on my own and report in ITR ?
Further on maturity interest for 6/7 years will be reflected in 26 AS and I will be reporting only interest for 6th/7th year since I follow accrual system.Will it lead to some problem ?
Thanks & Regds;
Bharat says
June 8, 2018 at 4:49 pmSir,
Further to my above query I would like to state that it was given to understand that interest on Cumulative GOI Bonds does not accrue in Bank or RBI records till maturity.No interest is paid/credited/provided till maturity.
In view of above every year interest income should be reported in ITR or total interest to be reported on maturity which may result in very heavy tax on maturity.
Thanks & Regds
Deepesh Raghaw says
June 18, 2018 at 11:47 amDear Sir,
I understand your concern,
However, I do not have a concrete answer to your question. Talked to a few people. No one seems completely sure.
There is a bit of confusion about how to report such income in income tax returns.
Suggest you talk to a CA about it.
hemant says
June 22, 2018 at 8:58 pmI am facing similar problem as Mr Bharat. Since nothing is uploaded till the year of maturity to 26AS (TRACES), you do not get the tax credit.Further on consultation CA(two different) say that the SBI bank has to upload it year-wise but they are surely not doing it for cumulative.
hemant says
June 22, 2018 at 10:28 pmPresently at least one has no option than to report the income only at maturity as then only it will be possible to get the tax credit from 26AS as CA is also not able to resolve the confusion in clear cut manner. Further we all should prevail upon RBI to spell out correctly these things in their document for these bonds that heir is no accrual of interest and the complete maturity amount will reflect as income in that year under 26AS. Then it will be investors choice depending on his tax slab as to whether or not to invest in this instrument.
manohar ochani says
August 2, 2018 at 11:57 pmIn case of non-commulative bonds when will they issue TDS certificate.
arpit says
September 17, 2018 at 11:11 amsir i want to invest 10 lakh rupees i want to know the interest is credited in non cumulative mode was going to credit in every 6 month but when that six month calculated by the date of deposit or any fixed date in a year
Deepesh Raghaw says
September 17, 2018 at 11:30 amHi Arpit,
For the first payment, the payment will be credited on January 31/July 31 (irrespective of the date of investment).
Thereafter, the payment will be made on 6-month intervals on January 31/July 31.
Sudha Sundar Rajan says
June 15, 2019 at 2:17 pmHi ,
We read your interesting write-up.
I wanted to know as to what percentage of interest will be deducted as TDS in this GOI bond of 2018 for the year. Though the RBI brochure talks of TDS, what the %ge rate will be, is not given.
Should we presume it will be the usual 10%?
Is there any RBI or FMy. circular which says so?
Thanks for your reply.
Sudha Sundar Rajan
kvsundarrajan@rediffmail.com