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Bonds and RBI Floating Rate Savings Bonds (FRSB) are both fixed-income instruments but they differ significantly in terms of tenure, liquidity, transferability, etc. Understanding these differences can help investors make informed investment decisions based on stability, liquidity and risk preferences.
Table of Content :
What are Bonds
Bonds are fixed-income securities issued by governments as well as public and private sector companies to raise capital for various financial needs. When an investor buys a bond, he/she is essentially lending money to the issuer in return for periodic interest (coupon) payments and repayment of principal at maturity. Bonds can be listed or unlisted, with listed bonds offering higher liquidity through trading on stock exchanges. Credit rating agencies like CRISIL, ICRA CARE, etc rate bonds based on their issuers’ financial health. This helps investors make informed choices before they invest in bonds.
Features & Benefits of Bonds
- Long-Term Investment Options: Bonds can have tenures of up to 40 years while perpetual bonds carry no maturity date. These long-duration options allow investors to lock in attractive yields for longer periods whenever market conditions are favourable.
- Capital Preservation: The principal amount is returned at maturity, making bonds suitable for those seeking capital protection during market volatility.
- Lower Price Volatility: Bonds usually have less price fluctuations compared to stocks, making them a stable investment choice for conservative investors.
- Risk Diversification: Including bonds in a portfolio helps balance the risks associated with more volatile instruments like equities.
- Potential for Capital Gains: Apart from interest income, bonds can generate capital gains if redeemed or sold at a price higher than the purchase value.
- Return Predictability: Fixed coupon payments and assured principal repayment enable investors to plan their cash flows with greater certainty.
What are RBI Floating Rate Savings Bonds
RBI Floating Rate Savings Bond (FRSB) 2020 (Taxable) is a central government-backed scheme wherein the coupon/interest rate of the bond is paid every 6 months, i.e., on January 1 and July 1 of each year. The current interest rate of RBI floating rate savings bond is 8.05% p.a., which is reset every 6 months and is linked to the National Savings Certificate (NSC) rate with a spread of 0.35%. It has a tenure and lock in period of 7 years.
RBI FRSB Bonds are best suited for conservative investors seeking steady income and returns with government backing without stock market risk.
Features of RBI Floating Rate Bonds
- Eligibility: Resident Individuals and HUFs are eligible to invest in the RBI Floating Rate Savings Bond. However, NRIs are not eligible to invest in FRSB.
- Forms of Bonds: Electronic form held in the Bond Ledger Account.
- Maturity period: 7 years from the date of issuance.
- Minimum Investment Limit: The minimum subscription amount is Rs 1,000, with investments in multiples of Rs 1,000 thereafter.
- Maximum Investment Limit: There is no maximum investment limit.
- Transferability: RBI FRSBs are not transferable and hence, cannot be traded on stock exchanges. However, transfer is allowed to the nominee(s)/legal heir in case of the death of the bond holder.
- Post Maturity Interest: Post Maturity Interest is not payable.
- Collateral: FRSBs cannot be pledged to avail loans.
- Taxability: Income from the bonds is taxable. Further, TDS will be deducted on the annual interest (if it exceeds Rs 10,000) received from these bonds.
Premature Withdrawal of RBI Floating Rate Savings Bonds
Premature withdrawal is allowed for senior citizen investors aged 60 years and above, upon submission of valid proof of age to the issuing bank. The minimum lock-in period varies by age group as follows:
- Ages 60–70 years: Lock-in period of 6 years from the date of issue
- Ages 70–80 years: Lock-in period of 5 years from the date of issue
- Ages 80 years and above: Lock-in period of 4 years from the date of issue
Premature withdrawal penalty: Investors opting for early withdrawal will be charged a penalty equalling 50% of the last coupon payment.
Difference between bonds and RBI Floating Rate Savings Bonds
| Distinction | Bonds | RBI Floating Rate Savings Bonds |
| Issuer | Government, public sector companies and private sector companies | Reserve Bank of India |
| Tenure | Varies widely; can go up to 40 years | Fixed lock in tenure of 7 years |
| Interest Structure | Mostly fixed at the time of issuance; some are floating in nature linked to external benchmarks | Floating rate; reset every 6 months (NSC rate + 0.35%); currently 8.05% |
| Credit Rating | Rated by SEBI-recognised agencies like CRISIL, ICRA, CARE, etc; Central & State Government bonds are not rated. | Not applicable (sovereign-backed) |
| Interest Payout Frequency | Monthly/quarterly/semi-annual/annually, depending on the type of bond | Paid semi-annually (January 1 & July 1) |
| Liquidity | Listed bonds offer higher liquidity as they can be bought or sold on stock exchanges | FRSBs cannot be traded or transferred; can only be prematurely withdrawn by senior citizens under specific lock-in rules. |
| Collateral/Loan Facility | Bonds can be pledged as collateral for loans, depending on the applicant’s credit profile and the lender’s risk assessment. | FRSBs cannot be used as collateral for loans. |
FAQs
Q. What is the minimum and maximum investment limit in the RBI Floating Rate Savings Bonds?
The minimum subscription amount for the RBI Floating Rate Savings Bond is Rs 1,000, with subsequent investments in multiples of Rs 1,000.
Q. Do Bonds give higher returns than RBI Savings Bonds?
Bonds can offer higher returns than RBI Floating Rate Savings Bonds, but this depends on the type of bond and prevailing market conditions. While the FRSB interest rate is 8.05%, several AAA-rated bonds in the market are presently yielding 8% or even higher. Lower rated bonds offer higher yields.
