RBI is discontinuing 7.75% saving bonds. Why? What does it mean to investors?
After the cut in deposit rates by the banks and a cut in small savings rate by the government over the last couple of months, the Reserve Bank of India on Wednesday said the Government of India has discontinued 7.75 per cent savings (taxable) bonds, 2018.
The move will deprive investors of another saving instrument that yielded relatively higher post tax returns for investors.
The 7.75 bonds 2018 were issued with effect from January 10, 2018 and were available for subscription to resident citizens/HUF to invest in a taxable bond.
While one bond was of Rs 1,000 each, the bonds had no maximum limit for investment. The bonds had a 7-year lock-in period from the date of issue, but, it permitted premature encasement to individuals who were 60 years and above.
Interest on these bonds will be taxable under the Income-tax Act, 1961.
The government has withdrawn these bonds and therefore it will not be available for new investors to invest.
The demand for RBI bonds went up significantly over the last couple of months as investors turned risk averse.
Even as the post-tax returns were low as compared to PSU-debt, experts say investors rushed for it as they saw it as the safest investment instrument available.
At this time investors are not looking for return but for the safety of their capital
As the 7.75 per cent RBI bonds were taxable instruments, the interest income on it would be taxable at the marginal tax rate.
In April 2020, the government announced a cut in the small savings rate. While the rates for PPF were cut from 7.9 per cent earlier to 7.1 per cent, that on Sukanya Samriddhi Yojana was brought down to 7.6 per cent from 8.4% earlier.
PSU debt papers offer post tax return of around 7 per cent.
The interest rates have been on a decline since the global growth rate projections have been brought down following the spread of coronavirusPandemic.
