What Are RBI Floating Rate Bonds and How Do They Work? Interest Rate, Returns, and Risk Explained.

Earlier, risk-averse investors primarily had two investment options: Real estate and Fixed Deposits (FDs). Due to these limited choices, the older generation, often wary of the volatile stock market, preferred investing in real estate, FDs, or small savings schemes.

To offer a market-linked and low-risk investment, RBI introduced Floating Rate Savings Bonds (FRSB). Let’s understand what RBI floating rate bonds are, how they work, and whether they are the right investment for you.

What Are RBI Floating Rate Bonds, and How Do They Work?

RBI floating rate bonds are government-backed debt instruments with a 7-year lock-in period that offer market-linked returns. The interest rate on these bonds is determined every six months, i.e., on 1st January and 1st July, and is linked to the National Savings Certificate (NSC) rate.

Here’s how the interest rate on RBI floating rate saving bonds is calculated.

Interest on RBI Floating Rate Savings Bonds = Interest rates on NSCs + a fixed spread rate of 0.35%.

For example, currently the interest rate on NSC is 7.70%.

Interest on RBI Floating Rate Saving Bonds = 7.70% + a fixed spread rate of 0.35% = 8.05%

When you invest in RBI floating rate savings bonds, your capital is locked in for seven years and earns semi-annual interest, providing a steady additional income.

RBI floating rate savings bonds require a minimum investment of ₹1,000, and only resident individuals and Hindu Undivided Families (HUFs) are eligible to invest in them.

RBI Floating Rate Bonds vs FDs: Which Is a Better Investment Option?

Both FDs and RBI floating rate savings bonds are long-term investments suitable for risk-averse investors. Let’s compare the two investments so you can make an informed investment decision.

Risks of Investing in RBI Floating Rate Bonds?

Though RBI floating rate savings bonds are government-backed and low-risk, they carry certain limitations and risks.

Highly Illiquid

RBI floating rate savings bonds have a strict seven-year lock-in period and cannot be traded or transferred in the secondary market, making them highly illiquid.

Age-based Lock-in Period

Investors under 60 years of age are not allowed to prematurely withdraw their capital. While senior citizens are permitted to make premature withdrawal, they are subject to a strict 4-6 year lock-in period and a penalty equal to 50% of their last coupon payment.

Income Uncertainty

Since the interest rate on RBI Floating Rate Savings Bonds is variable and reset every six months based on the NSC rate, the interest income is not fixed and can decrease if the RBI lowers the benchmark interest rate.

Interest Rate Risk

RBI floating rate bonds are ideal during a rising interest rate environment and may not generate good returns in a stable or falling rates environment.

Things to Consider Before Investing in RBI Floating Rate Savings Bonds

RBI floating rate savings bonds offer inflation-adjusted returns and are ideal for risk-averse investors. Consider the following factors before investing in them.

Non-Transferable

RBI floating rate savings bonds cannot be traded on the secondary market or transferred to another individual. You also cannot pledge these bonds as collateral for loans.

No Reinvestment Option

Interest earned is paid out semi-annually and cannot be reinvested or compounded to build a significant corpus at maturity.

Eligibility

Only resident Indians and Hindu Undivided Families (HUFs) can invest in RBI floating rate savings bonds. NRIs and corporates cannot invest in them.

Taxation

RBI floating rate savings bonds offer no tax benefits, and their returns are fully taxable at your income tax slab as ‘Income from other sources’.

FAQs

What are RBI Floating Rate Savings Bonds?

RBI Floating Rate Bonds are government-backed savings instruments with varying interest rates that change based on prevailing interest rates on NSC + a spread of 0.35%.

How do RBI Floating Rate Savings Bonds work?

These bonds offer interest rates linked to benchmark government securities. The rate is reset every six months, meaning your returns can increase or decrease depending on the NSC rate and the RBI monetary policy.

Are RBI Floating Rate Savings Bonds Safe?

Yes, they are considered very safe as they are backed by the Government of India and offer guaranteed returns, making them a low-risk investment option.

What is the tenure of RBI Floating Rate Savings Bonds?

These bonds have a fixed tenure of 7 years, with premature withdrawal options available only for senior citizens based on age.

How is interest paid on RBI Floating Rate Savings Bonds?

Interest is paid semi-annually, i.e., every six months, and is directly credited to the investor’s bank account.

What is the minimum investment required for RBI Floating Rate Savings Bonds?

The minimum investment amount is typically ₹1,000, and there is no maximum investment limit.

Can RBI Floating Rate Savings Bonds be sold or traded?

No, these bonds are non-transferable and cannot be traded in the secondary market.

Who can invest in RBI Floating Rate Savings Bonds?

Resident individuals and Hindu Undivided Families (HUFs) can invest. NRIs are generally not eligible to invest in these bonds.

Are RBI Floating Rate Savings Bonds taxable?

Yes, the interest earned is fully taxable as per the investor’s income tax slab.

What are the advantages of RBI Floating Rate Savings Bonds?

RBI floating rate savings bonds are government-backed, protect against rising interest rates, and offer regular income through semi-annual interest payments.

What are the disadvantages of RBI Floating Rate Savings Bonds?

There are a few disadvantages of investing in RBI floating rate savings bonds, such as no liquidity, interest rate risk, and no tax exemption for returns.