The government of India has recently launched Government Saving Bonds. These bonds will fetch 7.75% return to the investor. These bonds are taxable in nature. Let’s understand the salient features of these bonds and whether you should consider investing in these bonds.
Government Saving Bonds with 7.75% Interest rate – Key Points
These are not new bonds. The earlier 8% bond (2003) is withdrawn and new government saving bond is introduced. Key points about these bonds are given below.
- Maturity: Maturity of these Government of India Bonds is years.
- The Rate of Interest: The rate of interest of 7.75%, payable half yearly (In non-cumulative).
- The bonds are available in both cumulative and non-cumulative mode.
- Who can invest -Individuals and Hindu Undivided Family (HUF) can invest in such bonds. NRIs cannot invest in these bonds.
- Maximum Investment: There is no maximum limit on investment in these bonds.
- The bonds will be issued with minimum amount Rs.1000 and in multiples thereof.
- If an investment of Rs.1000 is made in this bond after 7 years maturity amount shall be Rs.1703.
- Taxability of Interest Income: The interest income from such bonds will be taxed at your income tax slab rate.
- Tax Benefit on Investment: You do not get any tax benefit for investing in these bonds.
- Pre-mature exit before maturity: These bonds come with a lock-in period of 7 years. You will not be able to exit these bonds before maturity. So, the investor with short-term investment horizon should not invest in these bonds.
- Loan Option – These bonds are not eligible as collateral for loans from banks or NBFCs either.
- No credit risk (unless you believe the Government of India can default on rupee-denominated debt.
- How to Invest: You can invest through selected bank branches or through websites of leading brokers.
- These bonds are not transferable and non-tradable in the secondary market.
Also Read – Post Office Fixed Deposit Interest Rates 2018
Government Saving Bonds 2018 – Calculation
As discussed above, these bonds are available in two modes. (1) Cumulative (2) Non-Cumulative
Cumulative Government Saving Bonds –
In a Cumulative mode, you will not get anything till maturity of the bond. Suppose you invest Rs.1 Lakh in these bonds at the end of 7 years you will get 1.7 Lakh as maturity amount. Pre-tax effective yield will be 7.9%. On the maturity amount tax is applicable as per tax-slab.
Non-Cumulative Government Saving Bonds –
Under non-cumulative mode, you will get interest amount back every six months. This means if you invest Rs.1 Lakh in this bond you will get Rs.3,875 every six months. At the maturity, after 7 years you will get your principal back.
Should you invest in Government Saving (Taxable) Bonds, 2018?
The interest income in this bond is taxable. So, the effective return will be very low. If investor is falling under 30% tax bracket, the post-tax return will be 5.5% p.a under non-cumulative mode. This means return from this bond cannot even beat inflation rate.
So, it is a big no for the young professional with taxable income, the guaranteed post-tax return of 5.5-7% p.a is not acceptable for medium-term investment.
Now, if we talk about senior citizen or retired people there are other regular income options such as Pradhan Mantri Vandana Vyaya Yojana (PMVVY) with 8% return (taxable) for 10 years and Senior Citizens Savings Scheme (SCSS) is offering 8.3% p.a. (as on January 5, 2018) for 5 years. Clearly, 7.75% bond will not withstand against these schemes of the government.
Another point is investing in this bond means locking money for 7 years. You will not able to access your investment in case of emergency. So, from return and liquidity point of view, it is a big NO for the government saving bonds.
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