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The Government of India Savings Bonds (Taxable), popularly called the RBI bonds will see a drop in their interest rate following a cut in the interest rate for small savings schemes. The interest rate on the RBI bonds is linked to the rate on National Savings Certificates (NSCs) with a 0.35% gap and is reset every 6 months. In Jan 2021 the rate was 7.15% given the 6.8% interest rate on NSCs. In a notification today, the Government cut the interest on NSCs by 0.9% from 6.8% to 5.9%.

As a result the RBI bonds are likely to see a drop in their interest rate from 7.15% to 6.25%. The RBI bonds have a tenor of 7 years and the interest rate on them is fully taxable. "I think investors can consider target maturity debt exchange traded funds (ETFs) and index funds for this type of time horizon. These are low cost and a number of these have been launched recently with a 'roll-down' type structure. This means that the fund buys and holds bonds till its target date and thus is able to give a predictable return. Such funds also benefit from indexation which reduces the burden of capital gains tax if held for more than 3 years," said Tarun Birani, founder and director of TBNG Capital Advisors Pvt Ltd., a Sebi Registered Investment Advisor.

ABOUT THE AUTHOR

Neil Borate

Neil heads the personal finance team at Mint. A former colleague called them 'money nerds' and that's what they are. They cover topics like mutual funds, taxation and retirement, all to improve your chances of building wealth. Neil graduated with a degree in law and economics. He passed the CFA Level I exam and began his writing career at Value Research, a mutual fund research firm in 2016. He joined the personal finance team Mint in 2019. Everyday, the Mint Money Team tackles personal finance questions such as where to invest and where to borrow, through articles, charts and reader queries. They also have a daily podcast - 'Why Not Mint Money' and an annual ranking of mutual funds - the Mint 20.
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