What are RBI Bonds and its features/details?

  • Soumyaa Rawat
  • Jun 05, 2021
  • Financial Analytics
What are RBI Bonds and its features/details? title banner

What are Investment Bonds? 

 

Investment bonds or simply bonds are secure and safe fixed-term financial bonds issued by corporate companies or sovereign governments all over the world. 

 

Purchased by the bond owner or the holder, usually individuals or citizens, these bonds are issued in order to raise money for major purposes like warfare, development, etc. when the issuer is the government or any governmental organization. 

 

In short, the issuer of these bonds owes a debt to the investor of these bonds. Until the term of maturity of a specific bond ends, the principal amount stays with the authorized issuer and is then returned to the investors along with the fixed interest rate. 

 

Also termed as Government of India Savings (Taxable) Bonds, such bonds are defined as the fixed-term instruments that take place between an issuer and an investor. 

 

 

Introduction to RBI Bonds

 

Among the various types of bonds to invest in, one of the most profound bonds is RBI Bonds. Introduced in the country in the year 2003, RBI Bonds are issued by the Government of India and are eligible to be held by the citizens of the country. 

 

One can purchase rbi bonds through sbi and 12 nationalized banks- State Bank of India, Bank of Baroda, Bank of Maharashtra, Canara Bank, Central Bank of India, Indian Bank, Indian Overseas Bank, Punjab and Sind Bank, Punjab National Bank, UCO Bank, Union Bank of India, 4 private banks- HDFC Bank, ICICI Bank, IDBI Bank, Axis Bank, and Stock Holding Corporation of India Limited. 

 

As we begin to understand how the concept of bonds works, we will primarily learn about the various features of RBI Bonds that will help us get a better insight.   

 

(Related blog: Types of Bonds)

 

Features of RBI Bonds

 

Here is a brief description of the numerous features that characterize RBI Savings Bonds-

 

  1. The eligibility of the investor willing to invest in RBI Bonds is as follows-

  • The investor should be a resident of the country (India).

  • The investor can be a major investing the bond in his/her name or a major investing the bond on behalf of a minor’s name.  

  • S/he should be able to afford the investment in individual or joint capacity.

  • The investor could also be a Hindu undivided family.

  • Non-Residents of India or NRIs are not eligible to invest in such bonds.

 

  1. The application form of the RBI Bonds can be acquired in the electronic form adhered to the Bond Ledger account.

 

  1. The maturity of an RBI Bond is 7 years. While the maturity term is 7 years, one could demand a return at any point in time. However, a penalty is applied to the same. 

 

For that matter, premature termination of an RBI Savings Bond attracts a penalty of 50% of the due interest amount that is required to be paid during the last 6 months or half year of the tenure of a bond. In addition, premature withdrawal of the rbi bonds for senior citizens does not attract a penalty.

 

“You should invest in these bonds only if you can lock-in your investment for 7 years. However, the lock-in condition is relaxed for senior citizens. For the investors in the age bracket of 60-70 years, 70-80 years and above 80 years, the lock-in period is 6,5 and 4 years respectively.”

RBI BONDS for Senior Citizens

 

  1. The time period of an RBI Bond is 7 years. The minimum amount one can invest in these bonds is INR 1,000. Even though there is no maximum limit set for this investment, an investor is required to invest in multiples of 1,000. 

 

  1. These bonds cannot be traded in the secondary market. RBI Bonds cannot serve as collateral for borrowing loans.   

 

  1. The rate of interest for RBI Bonds is fixed at 7.15%. The time period for an RBI Bond is 7 years and the interest earned on this investment is wholly taxable. This interest rate is reset every 6 months (January 1 and July 1). 

 

As of now, the rate of interest for RBI Savings Bonds is 7.15% from January 2021 to June 30, 2021, until it will be reset on July 1, 2021. 

 

  1. There are two options for the payment of interest. In the case of non-cumulative interest, the interest amount is paid after every 6 months or once in half a year. 

 

Whereas the cumulative option calls for the payment of the interest at the end of the maturity period. Moreover, the interest incurred from these bonds is taxable. 

 

  1. The ownership of these bonds is not transferable. This implies that an individual cannot transfer the ownership of an RBI Bond to another person. 

 

However, in the case of the death of the original bondholder, the bond is directly transferred to the nominee as indicated by the bondholder at the time of purchase of the bonds.  

 

  1. In either case, if the bond is owned by a single individual or is subject to joint ownership, all the registered bondholders are requested to file a nomination for the bond. 

 

“The sole Holder or all the joint holders may nominate one or more persons as nominee in accordance with the provisions of the Government Securities Act, 2006 (38 of 2006) and the Government Securities Regulation, 2007, published in Part III, Section 4 of the Gazette of India dated December 1, 2007.” RBI BOND 

 

  1. For the matured amount to be received directly at the time of maturity, it is mandatory for all bondholders to provide information of their respective bank accounts to the issuer, RBI. 

 

(Must read: What is mutual funds?)

 

 

Why to invest in RBI Bonds? 

 

Considering the features of RBI Bonds that we just went through, you might be wondering why invest in RBI Bonds? Well, the answer is simple. Not only are these bonds safe and secure but they are also highly profitable. 

 

Despite the long lock-in period that they provide to their investors, RBI Bonds are issued by RBI on behalf of the Government of India which makes these bonds totally safe for any and every citizen to invest. 

 

For those planning to invest their money in a safe place without any hassles, such government bonds are just the option they are looking for. As opposed to other investment alternatives like tax-free bonds or even Fixed Deposit (FD) accounts, these bonds still stand strong as they have a higher return, safer source, and a moderate lock-in time period as compared to the tenure of FD accounts and tax-free bonds. 

 

Referred to as coupon rate, rbi rates of interest of these bonds is a major highlight of this investment as these bonds provide a zero credit risk (possibility of failure of the borrower to repay a loan or debt). 

 

(Also check: What is Credit Rating?)

 

A source of raising funds for governmental projects and plans, RBI Bonds are far safer than any other source of investment since they are issued by the Reserve Bank of India on the behalf of the Government of India. 

 

All in all, in an investment sphere where security is the topmost factor, rbi floating rate interest rate bonds serve as one of the most trustworthy investment options for people belonging to all income brackets, especially the middle-income bracket. 

 

 

Conclusion

 

To wrap up, RBI Bonds or Government of India Savings (Taxable) Bonds are an effective and highly profitable source of investment. Safe and reliable, these bonds are issued by the Reserve Bank of India on behalf of the Government of India which makes the investment far more secure as compared to any other alternative like stocks, schemes, etc. 

 

(Related read: RBI: History, Objectives and Functions)

 

Furthermore, these bonds come along with a lock-in or maturity period of 7 years, and the rbi bonds interest rate 2021 for the same is 7.15% (applicable till June 30, 2021). 

 

With various features that define the eligibility of RBI Bonds and other enlist other important information too, one could get started with RBI Bonds at the minimum value of INR 1,000.

 

A promising investment for the long run, these bonds have a higher yielding capacity than other sources of investments like fixed deposit interest rate or Tax-free Bonds. 

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