The 8% Government of India(GOI) Saving Bonds (Taxable) , 2003 is a bond issued by the Reserve Bank of India (RBI) from April 21, 2003 onwards. The bonds are available for purchase by individuals at any time. Since these bonds are issued on behalf of the Government of India, it is the safest investment any investor can look for. However, interest on the bonds is taxable and it has a lock in of six years, which made the bond less attractive over other investment options. However fixed income investors are taking renewed interest in Government of India Saving Bonds, 2003 post the reduction in interest rates on Bank FDS.
As interest rates on Bank FDs and Govt Small Saving Schemes continue to tumble and interest rates expected to soften further, savvy investors are locking some of their money in these bonds that offer 8% returns. The bonds have a tenure of six years and investors can choose to take interest either on a half yearly basis or on a cumulative basis at the end of the tenure. In cumulative option as the interest of 8 percent per annum gets compounded half yearly, the resultant annual yield on 8% GOI Saving Bonds, 2003 is effectively 8.16 percent.
Update: The interest rates now stand at 7.75% and tenure is 7 years.
Salient features of 8% GOI Saving Bonds, 2003
Issuer: Reserve Bank of India
Eligible Investors: Individuals (single, joint or minor), HUFs, Charitable Trusts and Universities. NRIs are not permitted to invest in the GOI Bonds. Joint applicants can hold on joint basis or on anyone or survivor basis. The Bonds can also be held on behalf of a minor as father/mother/legal guardian
Face Value of the Bond: Rs.1000/-
Limit on Amount Invested: Minimum Rs.1000 or 1 bond. No limit on maximum investment.
Bond Duration: 6 years
Interest Rate: 8% per annum
Cumulative Option – For Rs.1000 bond value, 8% p.a., compounded on half yearly basis returns Rs.1601 at the end of 6 years
Non-cumulative Option – Interest for 6-months period ending in July and January, paid on Aug 1 and Feb 1
Taxation: Interest income on Government of India Saving Bonds, 2003 is taxable as per the investor’s income tax slab rate. Similar to Bank FDs, TDS is deducted if the interest exceeds Rs.10,000 in a financial year. However these bonds will be exempt from Wealth-tax under the Wealth-tax Act.
How to Buy: Authorized branches of State Bank of India, Associate Banks, Nationalised Banks, a few private sector banks and Stock Holding Corporation of India Ltd. Also on ICICI Direct and similar portals.
Non-transferable: The Bonds are issued in the form of credit in the Bond Ledger Account and are not transferable
LIsting: GOI bonds are not traded in the secondary market
Collateral: These bonds are not eligible as collateral for loans from banks, financial institutions or NBFCs
Nomination: Available
Premature Encashment: Restricted. Only for individuals of age 60 or more, after a minimum lock-in period of 3 years and up to 5 years
Partial Withdrawal: Not permitted.
Major Pros:
- In the last few years years, 8% GOI Saving Bonds were out of favor because post office time deposits and banks paid more than 8%. However with these rates slipping below 8% these bonds have become attractive.
- Investors can lock in at 8% interest for 6 years in a scenario where interest rates are expected to decline.
- The cumulative option results in annual yield of 8.16% as interest is compounded on half yearly basis.
- With no tax free bonds issue in the this year and no plan by the government for the same, the options for safe investment are limited.
- There is a good possibility that Govt will slash rate of interest on these bonds. This could happen anytime in the scenario of falling interest rates. Hence presently investors have possibility to earn 8% interest for next 6 years.
Major Cons
- 8% GOI Saving Bonds are suitable only for investors in lower income tax brackets.
- Debt mutual funds may be a much better alternative.
- No Liquidity as the bonds cannot be en cashed in the intervening period. No Provision to take Loan as well.
- In case the bond is not redeemed after maturity, no interest would accrue after the maturity of the bond