The equity markets in these troubled COVID-19 times are highly volatile and risky with their revival a couple of years away. The SENSEX slumped about 38% from its high of 41,945 on 17 Jan 20 to 25,981 on 23 Mar 20. During the same period, the Nifty also went down 38.3% from its high of 12,352 to 7,610. To add to the investors’ woes, the government downwardly revised the interest rates of its small savings schemes like Public Provident Fund (PPF) to 7.9%, Senior Citizen Savings Scheme (SCSS) to 7.1%, and Post Office Fixed Deposits(FDs) between 5.5 to 6.7%. It is important during volatile markets to stay afloat and ensure capital protection. Towards this end, the 7.75% Government of India (GOI) Savings Bonds offers a higher interest rate and risk-free option. The Reserve Bank of India (RBI) issued 7.75% Savings (Taxable) Bonds, 2018 with effect from January 10, 2018 in terms of GoI notification F.No.4(28) – W&M/2017 dated January 03, 2018. Since these Bonds are sovereign in nature, the government guarantees their payment on maturity.
Eligibility – any resident individual can buy these Bonds in his or her individual capacity, or in individual capacity on a joint basis, or in individual capacity on anyone or survivor basis, or on behalf of a minor as father/mother/legal guardian. A Hindu Undivided Family (HUF) can also purchase these Bonds.
Investment Limit – there is no maximum limit for investment in the Bonds. The minimum amount is ₹ 1,000 (face value) and in multiples thereof.
Subscription – to subscribe for these Bonds, RBI has nominated State Bank of India, Nationalised Banks, three private sector banks, and Stock Holding Corporation of India Ltd (SHCIL) as the receiving offices. One can subscribe to these Bonds in cash/drafts/cheques or any electronic mode acceptable to the receiving office. You must prepare the cheques or drafts in favor of the receiving office. Some banks permit only resident individuals to invest online in his/her individual capacity. Ipso facto, HUFsandindividualsdesirous to invest in joint holding mode must invest offline by filling up the physical application form. The bonds are mandatorily issued in dematerialized form and credited to the Bond Ledger Account (BLA) of the investor opened with the receiving bank. In turn, the bank issues a Certificate of Holding to the investor as a proof of his investment.
Interest – government issues the Bonds at 7.75% per annum interest rate in ‘Cumulative’ and ‘Non-cumulative’ options. It pays out interest on non-cumulative Bonds initially up to 31 July /31 January from the date of issue, and thereafter on01 August and 01 February for half-yearly period intervals ending 31 July and 31 January. However, it compounds the interest with half-yearly rests on cumulative Bonds and pays it on maturity along with the principal. In the latter case, the maturity value of the Bonds is ₹ 1,703.00 (principal and interest) for every ₹ 1,000/-(Nominal). It pays interest on Bonds held to the credit of BLA of an investor electronically as per the option exercised by the investor/holder.
Taxability– government taxes interest on 7.75% Savings (Taxable) Bonds, under the Income-Tax Act,1961 as applicable according to the relevant tax status of the bondholder. On the non-cumulative Bonds, banks deduct tax at source while making payment of interest from time to time and credit the same to Government Account. Whereas, on the cumulative Bonds they deduct tax at source on the interest portion of the maturity value, at the time of payment of the maturity proceeds, and credits it to Government Account. They do not deduct tax at source of individuals who make a declaration in the application form that they have obtained an exemption under the relevant provisions of the Income Tax Act, 1961, and have submitted a true copy of the certificate obtained from Income Tax Authorities. The post-tax returns of these Bonds for someone in the lower tax slab is more than someone in the higher tax slab. Please see the table below:
Nomination – the government has permitted nomination by a sole holder or all the joint holders (investors) of a Bond, being individual/s. They may nominate one or more persons who in the event of the death of the sole holder/all the joint holders will have entitlement to the Bonds and to the payment due thereon. The nomination comes with the condition that the person or each of the persons nominated is himself/herself competent and eligible to hold the Bond.
Transferability/Tradability – the Bonds held to the credit of BLA of an investor shall not be transferable. The Bonds are not tradable in the secondary market and are ineligible as collateral for availing loans from banks, financial institutions, and Non-Banking Financial Companies (NBFCs).
Repayment – the Bonds are repayable on the expiration of 7 years from the date of issue. However, the government has permitted premature encashment for individual investors in the age group of 60 years and above, after the minimum lock-in the period from the date of the issue. Lock-in period from the date of issue for investors in the age bracket of 60 to 70 years, 70 to 80 years, and above 80 years is 6, 5 and4 years respectively. In the case of joint holders or more than two holders of the Bond, the above lock-in period is applicable even if any one of the holders fulfills the above conditions of eligibility. After minimum lock-in the period from the date of issue, an eligible investor can surrender the bonds at any time after the 12th, 10thand 8thhalf-year corresponding to the respective lock-in the period but the government will only make redemption payment on the following interest payment due date. Thus, the effective date of premature encashment for eligible investors will be 1st August and 1st February every year. Moreover, the government will recover 50% of interest due and payable for the last six months of the holding period in such cases, both in respect of cumulative and non-cumulative Bonds.
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