Floating rate savings bond(FRSB)
If you are looking into investing in a highly safe debt instrument for long-term investment then FRSB fulfills that criteria. The government of India launched the Floating rate savings bond scheme on July 01, 2020, and unlike other bonds which have fixed coupon rates, FRSB has floating rates which pay a 7.15% rate of interest payable half-yearly. The rates for the FRSB are linked to the prevailing national savings certificate (NSC) and will be + 0.35% over the NSC rate. The interest rate of NSC is reviewed every quarter. FRSB has replaced the Government of India’s 7.75% bonds.
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Eligibility for investment:
Important information regarding the scheme:
| Items | FRSB |
| Entry age | There is no minimum entry age |
| Investment limit | Minimum – Rs. 1000 and Maximum -No limit |
| Forms of Bonds | Electronic form held in the Bond Ledger Account. |
| Rate of Interest (current) | 7.15% and Interest is payable semi-annually from the date of issue of bonds |
| Post Maturity Interest | Interest will not be paid after the maturity period of the bond. |
| Nomination Facility | Available |
| Tenure | 7 years |
| Premature redemption | Only available for senior citizens after the Lock-in period of 4, 5, and 6 years in the age bracket of 80 years and above, between 70 to 80 years and 60 to 70 years respectively. |
| Transferability | Non Transferable. |
| Account-holding categories | Individual, Joint, and Minor through a guardian. |
| Tradability / Advances | Not Tradable and cannot be used as a collateral |
Advantages of investing in FRSB:
- There is almost no credit risk involved as these are government bonds issued by the RBI.
- Interest rates are higher than normal fixed deposits and NSC.
- It can be a source of regular income as it pays interests on a half-yearly basis.
- Since we are in a high-interest rate environment, going forward if the NSC interest rate increases then the FRSB interest rate also increases.
Disadvantages:
- There are no tax benefits under section 80C and the interest earned on the bond is taxable.
- These bonds have a lock-in period of 7 years and are not transferable or tradable and cannot be used as collateral.
- There is no inflation protection, which means whenever inflation is above the latest interest rate, the deposit earns no real returns unless the RBI increases the interest rate to control inflation.
Also read : All about investing in Sovereign Green Bonds
National savings certificate(NSC)
The National Savings Certificate(NSC) scheme is a Government of India initiative and it is a fixed income investment scheme that you can open with any post office branch due to the high number of post offices present in India and the easy access to these post offices, the scheme has become very popular in India and it is a savings plan that allows investors primarily low to mid to low income investors to save on income tax while investing and this scheme allows such investors to seek a fixed return on investment with very low risk which is higher than the Banks fixed deposit interest rate.
Eligibility for investment:
- Resident Individual.
- HUFs and Trusts are not eligible to invest in the scheme.
Documents required to NSC;
- The NSC application form.
- Identification proof.
- A photograph.
- Address proof.
NSC account can be opened by visiting the nearest post office by using the above documents.
Important information regarding the scheme:
| Items | FRSB |
| Entry age | There is no minimum entry age |
| Investment limit | Minimum –Rs. 1000 (or multiples of Rs. 100) and Maximum -No limit |
| Forms of Bonds | Physical certificate with a passbook. |
| Rate of Interest (current) | 6.8% and Interest is payable at the end of the tenure |
| Post Maturity Interest | will be paid after maturity |
| Nomination Facility | Available |
| Tenure | 5 years |
| Premature redemption | Only available on the death of a single account, or any or all the account holders in a joint account or On forfeiture by a pledgee being a Gazetted officer or On order by a court. |
| Transferability | Transferable. |
| Account-holding categories | Individual, Joint type ‘A’, ‘B’ and Minor through a guardian. |
| Tradability / Advances | Not Tradable and can be used as a collateral |
Advantages of investing in NSC:
- There is almost no credit risk involved as these are government bonds.
- Can avail tax benefits under section 80C up to the cap of Rs. 1.5 lakhs.
- Except for the interest that is earned in the final year, the remaining interest that is generated is tax-free.
- Interest is calculated quarterly but only charged at maturity, without any TDS deduction
- All the major banks and NBFCs hereby recognize the National Savings Certificate as collateral or protection against the insured loans.
Now, the Disadvantages:
- The interest rate offered is fixed and hence may not offer real returns if they fall below inflation.
- The proposed e-mode for purchase is still not available at many post-offices and national banks.
- NSC comes with a lock-in period of 5 years.
Verdict:
Conservative fixed-income investors looking for assured higher gains in a high inflationary environment can opt for NSC or FRSC since their returns appear attractive if compared to other alternatives with similar tenures. For example, fixed deposits in banks usually give interest between 5% – and 6%. But investors should be conscious of the disadvantages as well since locking up money in a high inflation environment can be detrimental since the interest rate offered is fixed and hence may not offer real returns if they fall below inflation and also investors with higher tax slab must consider the post-tax yield since those in the higher tax brackets, especially 30% and above, would find tax-free bonds more attractive. So only investors who are comfortable in holding on to such schemes till maturity may invest in such schemes and investors who would prefer having a regular source of income can opt for FRSB instead of NSC.
Disclaimer:
This article should not be construed as investment advise, please consult your Investment Adviser before making any sound investment decision. If you do not have one visit mymoneysage.in
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