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Friday, February 2, 2018

GOI Savings (Taxable) Bonds

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In a falling interest rate scenario and perhaps to keep their fiscal numbers under control, the government has recently lowered the interest rate on the GOI Savings (Taxable) Bonds. The government has replaced the erstwhile 8 percent Savings (Taxable) Bonds 2003 with the 7.75 per cent Savings (Taxable) Bonds. The bonds opened for subscription on January 10. While most of the features remain the same, the tenure has been increased by one year. 

The bonds suit conservative investors who are looking for assured and fixed returns with complete safety of their principal amount. However, currently the interest rate is not high enough compared to instruments that a retiree usually looks at. 

At present, the Post Office Monthly Income Scheme and Senior Citizens' Savings Scheme (only for retirees) earns its investors 7.5 per cent and 8.4 percent, respectively. These schemes also come with a lower tenure of 5 years compared to 7 years for the GOI bond. Further, most banks are offering 6-7 percent per annum over a 5-7 years tenure. 

If you have already exhausted the limits of the Post Office Monthly Income Scheme (Rs 4.5 lakh) and SCSS (Rs 15 lakh) and are looking for a return higher than bank deposits, you can consider the GOI bonds while keeping your liquidity conditions in mind. 

But before investing in them, here are few important features you should consider. 

Who can invest in of GOI Savings Bonds? 
Any one who is a resident Indian in their individual capacity or jointly can invest in the scheme. They can also invest on a one or survivor basis and even on behalf of a minor as a parent or guardian. Hindu Undivided Families (HUFs) can also apply. However, non-resident Indians cannot invest in the scheme. 

How much can you invest in GOI Bonds? 
There is no maximum limit for investments. However, these bonds cannot be traded in the secondary markets. 
Interest rate on the bonds 

The bonds will be issued in 'Cumulative' or 'Non-cumulative' forms. Interest on the non-cumulative bonds will be payable at half-yearly intervals from the date of issue, while the interest on cumulative bonds will be compounded with half yearly rests and will be payable on maturity along with the principal. 

For cumulative bonds, the maturity value will be Rs 1,703 (being principal and interest) for every Rs 1,000 invested. 

For non-cumulative bond investors, the interest will be paid on August 1 and February 1 each year and it will be credited to the bondholder's bank account electronically. 

How can you invest in of GOI Bonds ? 
To invest, walk into any of branch of State Bank of India, select nationalised banks, private sector banks(ICICI Bank, HDFC Bank, Axis Bank, IDBI Bank and so on) or the Stock Holding Corporation of India, as specified in Annexure 3 of a finance ministry notification. There are a total of 23 banks or receiving offices. 

To apply for the bonds, you will have to fill up 'revised Form A' either physically or electronically. You can find the revised form here: https://goo.gl/zAMECv . 

The bonds are mandatorily issued in demat form and credited to the Bond Ledger Account (BLA) of the investor and a Certificate of Holding is given to the investor as proof of investment. 

Tax treatment of GOI Bonds
According to the Income-tax Act, 1961, the interest earned on the bonds will be added to the bond holder's income and will then be taxed according their tax rate. The bond is exempt from wealth-tax under the Wealth Tax Act, 1957. 

Tax deducted at source (TDS): Tax will be deducted at source when the interest is paid on the non-cumulative bonds. And for cumulative bonds, tax on the interest portion of the maturity value will be deducted at source when the maturity proceeds are paid to the investor. 

Redemption and early exit of GOI Bonds
Although the bonds have a tenure of seven years, they can be redeemed before maturity based on the age of the investor at the time of exiting. 

According to the finance ministry, for those in the age bracket of 60 to 70 years, the lock-in period is six years from the date of issue. For those between 70 years and 80 years, it is five years. And for anyone above 80 years, it is four years. 

Once an investor, depending on the age, becomes eligible for early surrender of the bonds, a premature exit can be made only at half yearly intervals, i.e., on August 1 and February 1 every year. 

The early exit, however, comes at a cost. On the date of premature encashment, 50 percent of the interest due and payable for the last six months of the holding period will be recovered in case of premature withdrawals, both for cumulative and non-cumulative bonds. 

Other features 
You can nominate more than one person. However, no nomination can be made in respect to bonds issued in the name of a minor. Also, you cannot take loans against the deposit made in the bonds. And the bonds held to the credit of an investor's Bonds Ledger is not transferable. 




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