RBI Floating & 54EC Bond

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RBI Floating Rate Savings Bonds 2020 (Taxable), also known as the GOI Bonds, currently offer a taxable interest rate of 7.35% over a seven-year term. They are called floating-rate bonds because the interest rate on these bonds is linked to the NSC rate. In accordance with the scheme guidelines issued on June 26, 2020, these floating rate bonds will continue to earn 0.35% higher ROI than the prevailing NSC rate. The coupon/Interest rate on these bonds is subject to change every six months, on January 1 and July 1, if NSC's ROI changes.

(For detailed Terms and Conditions, read the application form carefully)

RBI hikes interest rate on Floating Rate Bond 2028 by 53 bps to 7.88%; 0.18% higher than NSC

As per the RBI's press release, "In terms of Para 13 (ii) of Government of India Notification F.No.4(10)- B(W&M)/2020 dated June 26, 2020, on Floating Rate Savings Bonds, 2020 (Taxable)- FRSB 2020 (T), the coupon/interest rate of the bond would be reset half yearly, starting with January 01, 2021, and the coupon/interest rate will be set at a spread of (+) 35 bps over the prevailing National Savings Certificate (NSC) rate. The rate of interest on NSC has been revised to 7.00% for the fourth quarter of FY 2022-23, in terms of GoI notification F.No. 1/4/2019 - NS dated December 30, 2022. Accordingly, the coupon rate on FRSB 2020 (T) for the period January 1, 2023, to June 30, 2023, and payable on July 1, 2023, has been reset at 7.35% (7%+0.35%= 7.35%).
The interest rate on these floating bonds is linked to the rate of NSC. These floating rate bonds will earn 0.35% above the prevailing NSC rate, as per the scheme guidelines issued on June 26, 2020.

 

How interest rate is arrived at for floating rate bonds:

As the subscription of RBI's floating rate bonds was made available on July 1, 2020, the interest rate for the first coupon payment of the bond, due on January 1, 2021, was fixed at 7.15%. It was arrived at by adding a premium of 0.35% to the prevailing NSC rate, which was 6.80% as on July 1, 2020, and kept unchanged since then.

The interest rate on NSC is reviewed by the government every quarter. The government arrives at the NSC interest rate using the formula suggested by the Shyamala Gopinath Committee. As per the formula suggested by the Committee, the interest rate on different schemes should be 0.25-1% higher than the yields of the government bonds of similar maturity.

Features of Government of India Floating Rate Savings Bonds, 2020 (Taxable):

RBI launched the floating rate bonds in lieu of the earlier withdrawn 7.75% taxable bonds. As per the scheme notification, the features of the newly launched bonds are as follows:

a) Resident individuals and Hindu Undivided Families (HUFs) can invest in these bonds.

b) The minimum investment in these bonds starts at Rs 1,000 with no limit on the maximum amount.

c) The bonds have a fixed tenure of seven years. Premature withdrawals are allowed for individual investors whose age is 60 years and above, subject to a minimum lock-in period depending on the age of the bondholder.

d) These bonds do not offer to pay interest on a cumulative basis (at the end of the maturity of the bonds). The interest amount is paid out half-yearly on January 1 and July 1 every year.

e) The interest rate on these bonds is reviewed and reset every six months, every year.

The rate of interest on the Government of India Floating Rate Bond 2028 (GOI FRB 2028) applicable for the half year April 04, 2023, to October 03, 2023, shall be 7.88 per

The Reserve Bank of India (RBI) on April 28 announced a 7.93 percent interest rate on the Government of India's Floating Rate Bond 2034 (GOI FRB 2034) for the half year, April 30 to October 29, 2023.

“It may be recalled that FRB 2034 carries a coupon, which has a base rate equivalent to the average of the Weighted Average Yield (WAY) of the last three auctions (from the rate fixing day i.e., April 30, 2023) of 182 Day T-Bills, plus a fixed spread (0.98 percent),” the RBI said in a release.

Floating Rate Bonds are securities that do not have a fixed coupon rate. They have a variable coupon rate which is re-set at preannounced intervals.

The FRB bonds carry a coupon with a base rate equivalent to a weighted average yield of the last three auctions of 182-day Treasury Bills (T-Bill) plus a fixed spread decided by way of auction.

Details / Features of RBI Bond

Documentation:

 Item   Details   Remarks
1. Eligibility for Investment  The Bonds may be held by - Non-Resident Indians (NRI)s are not eligible to invest in these bonds.
(i) a person resident in India,
(a) in her or his individual capacity, or
(b) in individual capacity on joint basis, or
(c) in individual capacity on any one or survivor basis, or
(d) on behalf of a minor as father/mother/legal guardian
 
(ii) a Hindu Undivided Family
2. Form of the Bonds  Electronic form held in the Bond Ledger Account. A bond Ledger Account will be opened by the Receiving
Office in the name of investor/s.
3. Maturity period 7 years from the date of issuance. ---
4. Period  The Bonds shall be repayable on the expiration of 7 (Seven) years from the date of issue. Premature redemption shall be allowed for specified categories of senior citizens. The Bonds shall be fully repayable upon expiration i.e. after 7 (Seven) years from the date of issue. Premature redemption shall only be allowed for specified categories of senior citizens.
5. Limit of investment  Minimum ₹ 1000/- and in multiples of ₹ 1000/-. No maximum limit.
6. Floating Interest Rate & Reset Criteria (i) Interest is payable semi-annually from the date of issue of bonds, up The coupon/interest of the bond will be reset half yearly based on National Savings Certificate (NSC) rate (Base rate) + 35bps.
to 30th June / 31st December as the case may be, and thereafter  
half-yearly for period ending 30th June and 31st December on 1st July Half-yearly interest is payable on 1st January / 1st July.
and 1st January respectively.  
(ii) The coupon rate payable for the next half-year would be reset on The coupon on 1st January 2021 shall be paid at 7.15%.
1st January 2021 and thereafter, every 1st July and 1st January.  
7. Tax treatment Income from the bonds is taxable. Tax will be deducted at source while interest is paid.
    If an exemption under the relevant provisions of the
    Income Tax Act,1961 is obtained, it may be declared in the Application Form.
8. Transferability The bonds are not transferable. Transferability is limited to the nominee(s)/legal heir in case of the death of the holder.
9. Tradability /Advances The bonds are not tradable in the secondary market and also not ---
eligible as collateral for availing loans.  
10. Nomination A sole holder or a sole surviving holder of a Bond, being an individual, can make a nomination. ---
11. Date of Issue of bonds Date of receipt of subscription in cash (up to `20,000/- only), or date of ---
realization of cheque /draft/ funds.  
12. Premature redemption The facility is available to eligible investors after Lock periods of 4, 5, Penalty charges @ 50% of last coupon payment.
and 6 years in the age bracket of 80 years and above, between 70 to  
80 years and 60 to 70 years respectively  
13. Nomination Facility The sole Holder or all the joint holders may nominate one or more ---
persons as a 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.  
14. Bank account It is mandatory for the investor/s to provide bank account details to ---
facilitate payment of interest /maturity value directly to his/her/their  
bank account.  

Individuals

  • Duly filled in application form (Complete application forms with all pages in full, duly filled in from the investors)
  • Self-attested PAN card copy of the investor
  • Self-attested Address copy of the investor
  • Canceled cheque leaf of the bank which was mentioned in the application for interest and maturity payments
  • No correction/alteration is allowed in the application and the corrections if any to be duly authenticated by the investor

HUF

  • Duly filled in application form (Complete application forms with all pages in full, duly filled in by the Karta with stamp and signature)
  • Self-attested PAN card copy of the HUF
  • Self-attested Address copy of the HUF
  • Canceled cheque leaf of the bank which was mentioned in the application for interest and maturity payments
  • No correction/alteration is allowed in the application and the corrections if any to be duly authenticated by the Karta
  • List of coparceners in the Hindu Undivided Family along with their signatures attested by Karta

Minors

  • Duly filled in application form (Complete application forms with all pages in full, duly filled in from the Guardian)
  • Self-attested PAN card copy of the minor / Guardian
  • Self-attested Address copy of the minor / Guardian
  • Birth Certificate of the minor attested by the Guardian
  • Canceled cheque leaf of the bank which was mentioned in the application for interest and maturity payments
  • No correction/alteration is allowed in the application and the corrections if any to be duly authenticated by the investor.
  • In the case of POA, the Original POA is to be verified by the bank and certified as "Original Seen and Verified".

 

Section 54EC- Deduction on LTCG Through Capital Gain Bonds

Capital gain bonds or 54EC bonds are the fixed income instruments that provide capital gains tax exemption under section 54EC to investors. The tax liability on long-term capital gains from the sale of immovable property can be reduced by purchasing 54EC bonds.

The owner of the bonds is the debtholders or creditors of the issuer. These bonds are issued by infrastructure companies that are backed by the government. Hence, the risk factor gets mitigated by buying such bonds. The capital gain bonds are redeemable before maturity. One cannot sell these bonds as they are not listed on the stock exchange. The interest is reduced to 5% p.a. from 6% p.a. and is fully taxable in your hands.

Bonds eligible for exemption under section 54EC of the Income Tax Act

  • Rural Electrification Corporation Limited or REC bonds,

  • National Highway Authority of India or NHAI bonds,

  • Power Finance Corporation Limited or PFC bonds,

  • Indian Railway Finance Corporation Limited or IRFC bonds.

Key facts to avail of the LTCG exemption by investment in capital gain bonds

  • To avail the tax exemption the investment must be made within 6 months of the date of sale of immovable property.

  • Such investment can be redeemed only after 5 years. Before April 2018 the bonds could be redeemed within 3 years.

  • The exemption on investment is allowed only against long-term capital gains on the sale of immovable property (i.e. sale of land or building).

  • The exemption is available up to a maximum amount of Rs 50 lakh

How to calculate the tax exemption by investing in tax-saving bonds

Assuming that immovable property is sold at Rs. 70 lacks after a long-term period of 42 months from the date of acquisition. The indexed cost of acquisition is 46 lakh and the indexed cost of the improvement is Rs. 10 lakh. Calculate the capital gain that is taxable after claiming exemption in below two cases:

i.   Rs. 14 lacks invested in REC bonds within 6 months

ii.  Rs. 8 lacks invested in NHAI bonds within 6 months

I. Rs. 14 lacks invested in REC bonds within 6 months

Particulars

Amount (Rs.)

Sale consideration 

70 lakh 

Less: Indexed cost of acquisition

46 lakh

Less: Indexed cost of improvement

10 lakh

Long-term capital gain

14 lakh

Less: Investment in REC bonds 

14 lakh

Taxable long-term capital gain

Nil

II. Rs. 8 lacks invested in NHAI bonds within 6 months

Particulars

Amount (Rs.)

Sale consideration 

70 lakh 

Less: Indexed cost of acquisition

46 lakh

Less: Indexed cost of improvement

10 lakh

Long-term capital gain

14 lakh

Less: Investment in REC bonds 

8 lakh

Taxable long-term capital gain

6 lakh

In case the capital gain bonds are converted into cash before the period of maturity, then the amount so invested on which tax exemption was claimed, shall be taxable as long-term capital gain in the year of conversion.

For example, in the above case, if the bonds are redeemed before the maturity date, say in the financial year 2020-21, then Rs. 8 lakh shall be taxable as long-term capital gain in the financial year 2020-21.

How to make an investment in 54EC bonds

These bonds are not listed on the stock exchange. Hence you can buy them from the issuer directly either in a demat form or a physical form. Let us understand how to invest in the above-mentioned bonds:

Capital Gain Bonds

Investors can benefit from the capital gain tax exemption under Section 54EC of the Income Tax Act 1961 by investing in 54EC capital gain bonds. These bonds allow investors to save on long-term capital gains resulting from the sale of immovable property, provided they invest in the bonds within six months of the sale. The maximum investment limit for 54EC bonds is Rs. 50,00,000 per financial year. With effect from 1st April 2023, the interest rate on these bonds has been increased to 5.25% per annum. It is important to note that the interest earned on these bonds is liable to income tax.

These bonds have the highest safety rating, "AAA," and are issued by central PSUs, which means there is no risk involved in terms of repayment and interest.

Key Features

  •  Rate of Interest: 54EC bonds offer a 5.25% rate of interest payable annually.

  •  Investment Amount: The amount of 1 bond is 10,000/- and for PFC, IRFC, and REC the minimum number of bonds should be 2 that is 20,000/- for each and the maximum investment in 54EC bonds is 500 bonds amounting to Rs 50 lakhs in a financial year.

  •  Maturity: 54EC bonds come with a lock-in period of 5 years (effective from April 2018).

  •  Transferability: The 54EC bonds cannot be transferred from one person to another at any point in time.

  •  Tax applicable on interest: No TDS is deducted for resident individuals however TDS will be deducted for NRIs. Interest is taxable as per investor income slab for all investors

Tax Free Bonds

TAX Free Bonds are a kind of debt instrument. By investing in this type of asset, the investor gives a loan to the issuing entity. The investors will be repaid at the end of the tenure.

There are different kinds of bonds. Those bonds which are exempt from taxation on the interest income under the Income Tax Act, 1961 are called tax-free bonds. These are usually issued by government-backed entities.

What are the benefits?

Tax-free bonds have emerged as a highly popular investment option among investors. Here’s a look at some of its benefits:

  • Taxation: Interest earned from investments is often eligible for taxation. However, investors do not have to pay any tax on the interest earned through tax-free bonds. Thus, after-tax returns are higher for the tax-exempt bond. They also have a lower risk of default, as these companies are usually Government-backed entities.

  • High Post Tax Returns: As the interest is Tax Free, investors get higher post tax returns as compared to fixed deposits.

    • Liquidity: Listing of bonds on various exchanges provides liquidity to your investments.

    • Electronic access: Option of holding bonds in 'demat form' makes your investments easy to handle and monitor.

    • Credit rating: Agencies like CARE, FITCH, CRISIL, ICRA regularly asses companies and their financial health. They then issue a credit rating. Higher the rating, better the financial health. These agencies also issue credit ratings to tax-free bonds. This enables you to assess the quality of instruments.

What does KS Finoleg offer?

  • Public Issue: During the public issue of the bonds, you can invest in them by submitting a physical form furnishing the details as requested. Also, you can make an investment online and enjoy the ease of investing.

  • Exchange: Post the public issue, these bonds are listed on NSE or BSE or both. You can invest in these bonds through the way you invest in shares.

 

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