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.