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Business News/ Money / Personal Finance/  Should FD investors switch to floating rate savings bonds as they offer higher interest rates than SBI, ICICI, HDFC Bank
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Should FD investors switch to floating rate savings bonds as they offer higher interest rates than SBI, ICICI, HDFC Bank

Investors seeking higher interest rates are turning to the Government of India Floating Rate Bond 2034, which offers an annual interest rate of 8.05% from October 2023 to April 2024.

Floating rate savings bonds: According to experts, this is a better rate than several fixed deposit options. (Mint)Premium
Floating rate savings bonds: According to experts, this is a better rate than several fixed deposit options. (Mint)

The ultimate aim of investors is to grow their wealth, and the sooner, the better it is. They keep shuffling their money from savings accounts to liquid funds for the sole reason of higher interest rates. For those seeking a guaranteed fixed return, and do not want to take risks, fixed deposits (FDs) are considered to be a safer option, although the interest rates offered by top lenders like the State Bank of India (SBI), HDFC, ICICI, and others are not quite enticing.

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

What are Floating Rate Savings Bonds (FRSBs)?

FRSBs are interest-bearing, non-tradeable bonds, issued by the central government, which come 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 bonds 2020 were launched on July 1st, 2020 

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

“These bonds offer an attractive option for fixed-income investors, especially in comparison to bank fixed deposits," Amit Gupta, MD, SAG Infotech

The RBI Floating Rate Savings Bonds and NSC are both backed by the Indian government, ensuring the safety of invested funds. 

Also Read | Government Bonds vs Corporate Bonds: Which is better for long-term investment?

Fixed Deposit vs RBI Floating Rate Savings Bonds

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

“There is no maximum investment limit for these bonds, and they can be purchased with a minimum subscription of 1,000. In contrast, tax-saving fixed deposits have a limit of 1.5 lakh," said Amit Gupta.

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FD vs Floating Rate Savings Bonds: Taxation rules

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

RBI Floating Rate Savings Bonds perfect choice for these investors

At present, these RBI Floating Rate Savings Bonds are the perfect choice for people who are looking to save money for a long duration and get a safe and fixed 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 choice for many Indian investors, added Gupta

Until recently, these bonds were only accessible at select 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 23 October. 

Disclaimer: The views and recommendations made above are those of individual analysts, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.

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ABOUT THE AUTHOR
Sangeeta Ojha
A business media enthusiast. Writes on personal finance, business and banking.
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Published: 03 Nov 2023, 10:24 AM IST
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