For those who were disappointed with the government’s closing subscription to their 8 percent savings bonds (taxable), there is some good news. Subhash Chandra, Secretary of the Department of Economic Affairs, Ministry of Finance, has tweeted that the scheme of the bonds will be replaced by another one that will have an interest rate of 7.75 percent.
The re-launching of the Government of India’s bonds with the lowest interest rate coincides with the recent movement of the Ministry of Finance, which also revised the interest rates in the savings schemes of the post office. For retail investors and retirees, the bonds will remain lucrative even though the interest rate will be 25 basis points lower. With an interest of 7.75 percent, the instrument has the highest returns compared to other fixed-income products.
In the savings schemes of the post office, if you look at the products subject to taxes available to all citizens, the fixed deposit at five years has the highest interest rate of 7.6 percent. It is followed by the Monthly Income Plan that offers 7.5 percent. When compared to fixed deposits, an investor obtains a yield of 6.25% in the fixed deposit of the State Bank of India from 46 days to two years.
Those who are in the 30 percent tax bracket would still get a yield of 5.42 percent by investing in the new bonds that the government would issue. If an investor is in a tax range of 20 percent and 10 percent, you will get 6.2 percent and almost 7 percent profit after tax, respectively.
For those who are not in the highest tax bracket, returns are slightly better than what they can get in a debt fund, which has a duration or interest rate risk. These bonds have the highest level of security since they are backed by the sovereign guarantee. The average annual yield of the lowest duration debt funds is in the range of 6.4-6.6 percent before taxes.
8% Savings Bonds Scheme, also known as RBI Bonds Scheme, is not being closed. 8% Scheme is being replaced by 7.75% Savings Bonds Scheme.
— Subhash Chandra Garg (@SecretaryDEA) January 2, 2018
The government had submitted bond offers in 2003 by offering an interest rate of 8 percent. The bond of the Government of India had a fixed tenure of six years and there was no limit on the funds that an individual can invest in them.
The only other comparable instruments with GoI bonds are tax-free bonds that were issued by public sector companies (PSU) about two years ago. But investors would have to look for these bonds in the secondary market on the stock exchanges. But the secondary bond market has no liquidity and trade is not frequent. The sellers also ask for a much higher price. Investors also need to have a demat account to buy tax-free bonds.