RBI Bonds Stopped, What are Alternatives

What are RBI Bonds?

RBI Bonds also known as the Government of India Savings(Taxable) Bonds are the bonds issued by the Indian Government and hence provides a sovereign guarantee on the amount of investment made by the investors. The RBI Bonds 7.75% were opened for subscriptions to the public in January 2018. The taxable bonds have been popular among investors for its risk-free returns and other attractive characteristics.

Features of RBI Bonds

1. Eligibility

Investments in RBI Bonds can be made by any of the following:

Indian Resident Individuals
Hindu Undivided Families (HUF)

The bonds also allow for Joint holdings by investors. Non-Resident Individuals are not eligible for investments in these taxable bonds.

2. Issue Price & Investment Limits

The bonds will be issued at par and so the price will be Rs.1000(the minimum amount) for the face value of Rs.1000.

The minimum amount required to invest in the RBI Bonds is Rs.1000 and there is no maximum limit for investment. No upper limit for the investment is one of the most attractive features of these bonds.

3. Investment Tenure

The maturity & lock-in period of the GOI RBI Bonds is 7 years from the issue date. Premature encashment (relaxation in tenure of Lock-in period) is only allowed for the investors above the age of 60. Below are the minimum lock-in tenures for senior citizens:

6 Years - For investors in the age range of 60-70 Years.
5 Years - For investors in the age range of 70-80 Years.
4 Years - For investors above the age of 80 Years.

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4. RBI Bonds Interest Rates & Payments

There is a fixed interest rate of 7.75%p.a. on the RBI Bonds which is higher than the other saving schemes. Investors have two options in regards to receiving interest payments:

Cumulative - Choosing the cumulative option for interest payments would mean the investors will not receive any interest payments during the investment tenure and the interest applicable to the bonds every year (compounded semi-annually) will be accumulated & payable at the maturity of the bond, thereby also getting compounding benefits. For a face value of Rs.1,000, the investors will receive Rs.1,703 (including interest) at the maturity (at the end of 7 year period).
Non-Cumulative - On selecting the Non-Cumulative option, the investors will receive semi-annual interest payments( to be paid in 1st August & 1st February) calculated annually. For a face value of Rs. 1000, the investors will receive semi-annual payouts of Rs 38.75.

5. Taxation

Investments in RBI taxable bonds are not eligible for any tax deductions and the interest earned on them is taxable as per the income tax slab rate applicable to the investors.
Tax will be deducted at source at the time of payments being made to investors for the Cumulative RBI Bonds.
Tax will be deducted at source while paying the investors at the maturity for the Non-Cumulative Bonds.

6. Nomination

Nomination facility is available to the sole or joint holders of the 7.75% Bonds where in the event of the death of the holder or holders, the specified nominees will be entitled to the bonds & receive the payments.

7. Transferability

The RBI Bonds cannot be transferred to anyone else. Also, they are non-tradeable (no transactions of buying & selling can be conducted) in the secondary market.

The Bonds are not eligible to be used as a collateral for getting loans from any financial institutions.

8. Risk

Being a Government of India backed product, the RBI Bonds carry the sovereign guarantee on the amount of investment and therefore is one of the safest investment products. They are best suitable for investors who are risk-averse and want to earn risk-free returns.

9. Holding

The RBI Bonds can only be held by the investors in the demat form, at the credit of the holder in BLA(Bond Ledger Account) which is opened with the receiving banks or Stock Holding Corporation of India Ltd.

The investors can purchase the bonds through the SHCIL or the receiving banks authorized by RBI.

On 27 May 2020, the Reserve Bank of India announced the cessation of 7.75% RBI Bonds with effect from the closing on 28 May 2020. These bonds would be no longer open for subscriptions.

However, the investors have many other investment options offering similar(or higher) returns having different characteristics for investments.

Other Investment Options

Popular Alternate Investment Options available to the investors

Comparison Chart

Investments	Interest	Risk	Liquidity
RBI Bonds	7.75%(pre-tax)	No-Risk	Illiquid
Tax-Free Bonds	5-6% YTM	Very Low or Negligible	Low Liquidity
Bharat Bond ETF	3 year ETF- 5.71% 10 year ETF- 6.84%	Moderate Risk	Low to moderate
Debt Funds	6-8%(Net Yields after expense)	Moderate Risk	Moderate
Bank Fixed Deposit	5-6%(Pre-tax)	Low Risk	Low Liquidity
Tax-Saving Bonds	7-9% coupons (Pre-Tax)	Moderate Risk	Illiquid

1. Tax-Free Bonds

Tax-free bonds are the bonds issued by the Indian government to raise money for funding the developmental projects of the economy. They have been very popular among investors for the main reason as the name implies“Tax-free” Bonds. The interest earned on these bonds is exempted from tax under section 10 of the Income Tax Act,1961.

These bonds are issued by the government through its public enterprises such as the National Highways Authority of India (NHAI), Housing & Urban Development Corporation Limited (HUDCO), Indian Railway Finance Corporation Limited (IRFC), India Infrastructure Finance Company Limited (IIFCL), National Bank for Agriculture and Rural Development (NABARD), etc. Depending on the government company issuing the finances, the raised money is used for various housing and infrastructure projects.

Features

Tax-free bonds have long maturity tenures of 10,15 and 20 years. These bonds have a lock-in and investors cannot withdraw them before the expiry.
Tax-free bonds are normally listed on exchanges such as the NSE for the purpose of trading. However, being long term investment products there is low liquidity in the secondary market for the investors to buy or sell these bonds.
Interest payments on Tax-Free bonds are exempted from tax and the investors are not required to pay any tax on this income under section 10 of the Income Tax Act,1961.

However, any capital gains from selling these bonds within three years of the purchase are taxable at the investor’s applicable slab rate. In the case of selling after three years, capital gains(if any) will be taxed at 10% LTCG without indexation or at the rate of 20% with indexation benefit.

4. These bonds are also one of the safest investment options available in the market to investors, being backed by the government of India. Most of these bonds are rated as ‘AAA’ and so there are very low or negligible risks associated with the non-payment or default by these bonds.

5. Just like RBI Bonds, there is no upper limit on the investments in these bonds. These bonds offer a slightly higher interest rate to retail investors. However, the limit to achieve this higher interest rate is a maximum investment of Rs. 10 Lakhs.

At the current prices, the Yield to Maturity of these bonds are in the range of 5-6% tax-free.

The Tax-Free Bonds are suitable for investors in higher tax brackets as they can earn more from these bonds as compared to the FDs(assuming 30% tax rate) and getting a lower post-tax return.

2. Bharat Bonds ETF

Bharat Bond ETFs, exclusively offered by Edelweiss AMC are the passive funds listed on the National Stock Exchange which invests in various bonds issued by public sector enterprises or financial institutions. The bonds have minimal credit risk because of their investments mostly in AAA graded papers or bonds. However, they are affected by movements of interest rates in the economy.

Features

The Bharat Bond ETF is available for two investment tenures i,e for 3 years & 10 years. The iNAV of the Bharat Bond ETF 2023 (3 years maturity) is 5.71% and 6.84% for the 10-year maturity Bharat Bond ETF expiring in 2030.
The underlying bonds are selected in such a way that their maturities closely match with the maturity of the ETF.
There is no lock-in period of investments in Bharat Bond ETF. Unlike RBI Bonds, these bond ETFs are tradeable on the National Stock Exchange. Buying & Selling of these ETFs can be made just like stocks.
No regular interest payments are made to the investors rather the interest earned from the underlying bonds are reinvested into the ETF.
There are no tax benefits associated with the investments in these bond ETFs. They have the same taxability which is applicable to debt fund investments.

The Bharat Bond ETFs are suitable for investors with a moderate risk appetite.

3. Debt Funds

Investors can also look into investing in less volatile categories of Debt Funds i.e Corporate Bond Funds and Banking & PSU Funds.

Corporate Bond Funds are debt mutual schemes which invest at least 80% of their assets in bonds issued by the corporates(AA+ and above) as mandated by SEBI. Investing in low-risk papers like AAA graded bonds makes this scheme more safer than other debt mutual funds like Credit risk which relatively invests in high-risk bonds.

Banking & PSU Funds are the debt mutual funds that invest a major portion of its assets in high-quality securities or bonds issued by Banks, Public Sector entities, or financial institutions. Investing in public sector units makes these funds more safer among the categories of debt funds.

These funds are suitable for investors having moderate risk-appetite with an investment horizon of at least 3-5 years. Investors can expect net returns of 6-8% from these categories. The post-tax returns from these funds comes out to be higher than what the RBI Bonds offer because of indexation benefits on holdings for longer than 3 year period.

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4. Bank Fixed Deposits

Risk-averse investors can look into putting their money in bank fixed deposits. The interest rates from these deposits varies across banks and is generally in the range of 5-6%. The Bank FDs are also one of the safest investment options available to investors given the very low chances of defaults by banks.

Post-Tax returns from these deposits come out to be very low, merely covering the inflation.

5. Tax-Saving Bonds

Tax Saving Bonds are the long tenure infrastructure bonds having a minimum lock-in period of 5 years. These bonds are not so popular among investors due to not so attractive coupon rates. However, Tax-Saving Bonds offer tax benefits to the investor by the way of their eligibility to claim tax deductions up to Rs 20,000 on investments in government-approved infrastructure bonds under section 80CCF of Income Tax Act,1961.

The bonds may not necessarily be of very high quality like AAA grade papers, so it is suitable for investors who are willing to take some risks & park their money for a long investment tenure.

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