All about Government Savings Bonds
Demonetization has severely impacted every business and many businesses are in fear of shutting down which could result into rise in NPA’s of banks, further, bank accounts are filled with hefty money on which banks have to give interest. Both these factors forces banks to decrease interest rates on Fixed Deposits.
SBI was the first bank to cut interest rates and made headline few days back by slashing interest rates on high value bank fixed deposits up to 1.75 percent. Following SBI, many banks have already cut down interest rates and in coming months we may see more rate cuts.
So why to stick with same old investment option with lesser interest? It’s time to think out of the box.
What are Government Savings Bonds?
Government Savings Bonds are issued by Reserve Bank of India on behalf of Government of India. Since GSBs are backed by GOI, they are one of the safest investment options at present in India. RBI has started issuing Government Savings Bonds with effect from on 21st April, 2003. These bonds were first issued at 8% interest rates and continue with the same interest rates till now.
Features of Government Savings Bonds
Individual Investors either individually or jointly or on behalf of minor can invest in Government Savings Bonds. Further, Hindu Undivided Family (HUF), Charitable Institutions and Universities are also eligible for investment in GSBs. However, NRIs are kept out of eligible investors list.
Investment in Government Savings Bonds gets locked-in for 6 years from the date of issue, with no pre-mature withdrawal option like PPF, EPF etc. The amount will be withdrawable only after 6 years i.e. on maturity date. In case the bond is not redeemed after maturity, no interest would accrue after the maturity of the bond.
Interest Rate and Payment
GSBs are carrying fixed rate of interest of 8 percent per annum from the date GSBs were first issued. However, interest of 8 percent per annum gets compounded half yearly which makes annual yield of 8.16 percent.
Investor can either go for non-cumulative bonds or cumulative bonds. Under non-cumulative bonds, interest will be paid at half-yearly intervals from the date of issue. While under cumulative bonds, interest will be compounded on half-yearly basis and paid on maturity along with the principal amount. Under cumulative option, investment of Rs.1,000 will be Rs.1,601 (including interest) at the time of maturity i.e. after 6 years from the date of issue of bonds.
Interest under non-cumulative bonds is calculated on half-yearly basis i.e. from 1st February to 31st July and 1st August to 31st January. The interest gets credited on the very first day after the end of 6 months period. For example if you apply for GSBs on say 1st June, than your first interest amount will be calculated from 1st June to 31st July (for two months) and gets credited on 1st August and thereafter, from 1st August to 31st January which will be credited on 1st February.
The minimum investment amount under Government Savings Bonds are kept as low as Rs.1,000 (face value) and in multiples thereafter. There is no maximum limit of investment.
Mode of Payment
The investment can be made via cheque, draft or cash. Cheques or Drafts should be drawn in favour of receiving office and payable at the place where the applications are tendered.
GSBs cannot be transferred to any person however, nomination facility is available.
GSBs are not tradable in the secondary market aka stock market and cannot be kept as a collateral security for taking loans from banks, NBFS, MFI etc.
Taxation of Government Savings Bonds
There are no tax benefits attached to the Government Savings Bonds in terms of deduction of investment or rebate in interest accrued. Investment made under GSBs cannot be claimed as deduction like NSCs, SCSS, ELSS, ULIP etc. under section 80C.
Interest accrued from GSBs is taxed as any other income without any benefit or rebate. It is added under Income from Other Sources and taxed as per applicable slab rate.
TDS is also applicable if interest earned exceeds threshold limit of Rs.5,000 per annum. Government vide Notification No. F 4 (10) – W&M / 2003 dated 13th January 2004 has clarified that no tax shall be deducted in form of TDS and investor is required to pay tax on the interest earned/accrued.
Under cumulative bond option accrued interest should be added to the income and taxed accordingly.
Should you Invest in Government Savings Bonds?
Government Savings Bonds fetches interest at 8 percent per annum (pre-tax) which at currently exceeds interest provides by almost every Bank Fixed Deposits. Keeping in mind the safety of investment only tax-free bonds stands above GSBs but unfortunately no issue of Tax-free bonds are currently open for subscription. Since tax-free bonds are traded on exchanges so can be bought from secondary market but buying will attract certain charges such as brokerage, STT etc. Thus investor would be better off buying tax-free bonds than GSBs. However, one needs to keep in mind the time period of the bonds which in case of tax-free bonds is generally 10 years to 15 years.