RBI Tax Savings Bonds: Invest in 7.75% Savings Bonds

What is RBI 7.75% Saving Bond?

From the 10th of January 2018, the 8% 6 year Saving Bond has been replaced by 7.75% Saving Bond with a maturity period of 7 years, with other conditions surrounding the bond remaining the same. However, the Government of India declared its intention to issue 8% 6-year saving bonds effective from 21st April 2003 through Notification No. F.4(10)-W&M/2003, read with Notification F.No. 4(10)W&M/2003. It is known as such as it provided an 8% interest on the principal invested, and reaches maturity at the end of 6 years.

Who can invest?

According to the notification, the following entities are allowed to hold the bonds:

• An individual who is not a Non-Resident Indian (i.e. they must be a citizen of India):
  1. In an individual capacity;
  2. In an individual capacity on Joint Basis;
  3. In an individual capacity on anyone or survivor basis - wherein the event of death, the bond can be sold back to the original issuer;
  4. On behalf of a minor by the father/mother/legal guardian;
• A Hindu Undivided Family;
• A “Charitable Institution” registered under the 25th Section of the Indian Companies Act of 1956;
• An institution which has obtained a Certificate of Registration as a charitable institution in accordance with a law in force in the Republic of India;
• Any institution which has obtained a certificate from the Income Tax Authority for the purposes of Section 80G of the Income Tax Act of 1961;
• A “University”, meaning a university which has been established or incorporated under a Central, State or Provincial Act, and includes an Institution declared under Section 3 of the University Grants Commission Act of 1956, to be a University for the purposes of that Act.

Can I nominate someone to hold the bonds in case of death?

It must also be noted that a sole existing holder, i.e. an individual person who holds the bonds may nominate another person or persons in the event of their death who shall be entitled to the ownership as well as any payment due on the bond. This must be done through the form “B” of the 7.75% 7-year taxable bond.

What is the issue price and maximum investment limit?

The bonds will be issued at par or at 100%, i.e. the amount of the bond will be for exactly the amount that has been paid. The bonds will be issued at a minimum of 1000 INR, and multiples thereof. Hence, the minimum investment limit is 1000 INR while there is no maximum limit on investment.

How can I buy the Bonds and in what form will they exist?

• The bonds can be bought through the cheques/cash/Drafts. The bonds have been issued since April 1st 2003 and will be issued till further notice from the Government via a notification.
• The bonds will be held in the credit of the holder in the Bond Ledger Account. New Bond Ledger series with the prefix (TB) will be opened in the name of the issuer of the bonds.
• In case an entity already has a Bond Ledger Account, all new issues of the 7.75% (taxable) six-year bonds will be seen as a new investment under the Bond Ledger Account.

Who will issue the Bonds and where will they be available?

The Bonds, in the form of the Bond Ledger Account as described above, will be issued by and held with designated branches of the agency banks and Stock Holding Corporation of India Limited (SHCIL) as authorised by the Reserve Bank of India. These include:

• All SHCIL offices,
• Specific branches of the State Bank of India,
• All other nationalized banks and,
• certain other private sector banks, such as ICICI Bank and HDFC Bank.

It is important to note that these bonds cannot be bought on the Stock Exchange as a tradable commodity.

What specific forms need to be filled for issuing the bond?

The Certificate of Holding, which proves that an entity owns the bonds, will be issued in Form TBX and Form TBY as applicable for cumulative and non-cumulative investments respectively. The date of issue of the Bond will be as according to either the date of realization of the subscription cheque or draft or the date of subscription via cash.
Applications for the bond can be made by filling form “A”, stating clearly:

• The full amount,
• The full name and
• The address of the applicant.

The applications must be submitted with the necessary payment in the form of cash/cheque/draft.

How will the Bonds be taxed?

1. Income Tax - 7.75% six-year bonds shall be taxable under the Income Tax Act of 1961 and in accordance to the relevant taxation income level of the bondholder.

2. Wealth Tax - The bond shall be exempt from wealth tax, in accordance with the Wealth Tax Act of 1957.

All applicants who have a certificate which exempts them from paying tax under the relevant sections or provisions of the Income Tax Act of 1962, must make a declaration regarding the same in the Form “A”. They must also submit a true copy of the certificate exempting them from the tax as issued by the Income Tax Authorities.

Can I transfer the Bonds once I have bought them?

While individuals can nominate others to whom the ownership of the bond will pass in case of death, they cannot be transferred to another entity while the bondholder is alive. This is because the bond is not a tradable commodity or security which can be bought or sold in the stock market. This also means that the bond cannot be used as collateral in Banks, financial institutions or Non-Banking Financial Companies (NBFCs).

How is the interest on the Bond calculated?

• The bondholder has the option of taking interest in either cumulative or non-cumulative form on the bond.
• The bond will bear an interest rate of 7.75% per annum.
• Interest on non-cumulative bonds will be payable at an interval of 6 monthly intervals from the date of issue. The date of issue is determined by the day on which the bond is paid for, as mentioned above. The first payment of interest of the bonds shall be paid by 31st July or 31st January, as in accordance with the date of issue, and thereafter on either 1st February or 1st August, as according to the date of issue.
• In the case of cumulative bonds, the interest will be compounded every 6 months and will be payable at the bond’s maturity, along with the principal. In this case, the amount due and payable at the end of the 7 years will be 1703 INR, including both interest and principal, for every 1000 INR investment into the bond.

It must be noted that the bond will reach its maturity at the end of 7 years. No interest will accrue on the bond post its maturity date.

What is the rate of the brokerage on this bond?

• The government has decided to provide a brokerage fee of INR 1.00 (one Rupee) on every 100 INR to all brokers.
• This includes PPF and UTI agents who are registered with the offices or banks that have been authorised to issue these bonds as well as the Receiving Offices, as has been mentioned above, by the Reserve Bank of India.
• The brokerage fees will be paid for by the Central Accounts Section of the Reserve Bank of India, located in Nagpur.
• Handling and service charges will be paid for by the Public Debt Office of the Reserve Bank of India.

Conclusion

Availing the 7.75% 7 year (taxable) savings bond is extremely easy as the amount required for investment is as low as 1000 INR and the procedure is extremely accessible. It is a scalable solution to liquidity problems as well with an option between cumulative and non-cumulative investment types. Additionally, with a 7.75% return on investment, it is as good, if not better, than most other fixed deposit interest rates available in the market or in private sector banks today. It is a healthy and safe option with a steady return on investment. While the bond is not exempt from income tax, it does not accrue any wealth tax, and therefore the option of nomination remains open to those who need it, especially the senior citizens. Overall, for those seeking to save some money while accruing a better rate of interest than what is available in today’s fluctuating market, this bond is an extremely healthy and lucrative option.