The Government of India Savings Bonds (popularly known as the RBI bonds) have maintained their advantage over bank fixed deposits, with the government retaining 7.15% rate for Jan-March 2021. Most FD rates in large banks are in the 4-6% range. These bonds have a tenor of 7 years and the interest earned is fully taxable.
The RBI Bonds do not have a fixed interest rate. The interest rate is reset every 6 months. It is linked to the prevailing rate on National Savings Certificates (NSCs), with the Savings Bonds paying out 0.35% more than the NSC rate. However investors should note that the term of NSCs is 5 years compared to 7 years on the Savings Bonds. Interest on NSCs is also eligible for tax deduction up to ₹1.5 lakh per annum while no such tax advantage is enjoyed by the RBI Bonds.
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In its latest reset for Jan - March 2021, the interest rate on the NSCs has been retained at 6.8%, thereby maintaining a 7.15% on the Government of India Savings Bonds. These RBI bonds pay out interest on 1st Jan and 1st July each year. You can buy them from branches of SBI, other nationalised banks and some private sector banks such as ICICI Bank, Axis Bank and HDFC Bank.
There is no maximum limit for investment in these bonds while the minimum amount is ₹1,000. Senior citizens are allowed premature exit after 4, 5 and 6 years for those aged 80 and above, 70 - 80 years and 60 - 70 years of age respectively. However in case of premature exit, half of the interest due for the 6 months immediately preceding the exit is deducted.
"The Sovereign backing and high interest rate makes these bonds extremely attractive for fixed income investors. However the long tenor compromises on liquidity. I suggest debt mutual funds to clients who have a need for liquidity," said Tarun Birani, founder, TBNG Capital, a Sebi registered investment advisor.
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