n India, there are a number of instruments through which one can invest their hard-earned savings and create value/ wealth in the process. In this article, we are going to understand more about two such instruments – Floating Rate Savings Bonds (‘FRSBs’) and National Savings Certificates (‘NSCs’).
What is a floating rate saving bond (FRSB)
FRSBs are taxable bonds introduced by RBI in July 2020 and it is considered to be the replacement of its earlier Risk-Free 7.75% Bonds which were discontinued by the RBI in May’2020. These have a floating rate interest, meaning thereby that the interest rate will keep varying during the tenure of the bonds and will get reset every six months. The rate of FRSB is linked to the prevailing national saving certificate (NSC) and will be + 0.35% over the NSC rate. Currently, the rate of interest on FRSBs has been set at 7.35% per annum payable half-yearly for the period January 1, 2023, to June 30, 2023, which will be payable on July 1, 2023.
Eligibility for investment
● Resident Individual
Advantages of investing in FRSB
● 100% Risk free investment option;
● Interest rates are generally higher than normal fixed deposit interest rates (although, currently, a lot of banks FD’s rates are higher) ;
● It can be the source of regular income as they provide interest on half yearly basis;
● Floating Interest Rate As and when the rate of interest on NSCs will increase, FRSB interest rate will also increase correspondingly
Min Invst being as low as 1000 with no upper limit
Disadvantages of FRSB
- There is no tax benefit and the interest earned is taxable; TDS is deducted when the interest is paid out
- They have a lock-in period of 7 years;
- They are non-tradable and non-transferable;
- Premature redemption is not available to all strata of investors except for senior citizens of age above 60 years.
- The Bonds are not eligible as collateral for availing loans from Banks, Financial Institutions & Non-Banking Companies.
It appears that the RBI has not made many efforts to make the investment in these bonds lucrative for the general public. For instance, A major damper is the non-availability of any specific tax incentive on these bonds – neither is the investment in these bonds eligible for any tax benefit (say, Section 80 C) nor is the interest tax-free or taxable at a concessional rate. Moreover, these bonds are non-tradeable, non-transferable, and not eligible to be used as collateral for availing loans from banks/ financial Institutions/ non-banking financial companies. To top it all, FRSBs come with a lock-in period of 7 years, and premature encashment in respect of the Bonds is allowed for individual investors in the age group of 60 years and above. The minimum holding period from the issue date is 6 years for the 60 to 70 age group, 5 years for the 70 to 80 age group and 4 years for those above 80 years.
What is National Saving Certificate (NSC)
NSC is an initiative of the Government of India to promote saving amongst its citizens. It’s a fixed-income investment scheme that one can open with any Post Office in India, which is primarily the reason for the raging popularity of this scheme in India. This scheme is especially preferred by small and mid-size investors who seek a higher-than-FD-rate fixed return on investment with very low risk. Currently, the interest rate on NSC is 7.00% per annum (which, ironically, is lower than most prevailing bank FD rates).
The Lock-in period of National Saving Certificates is 5 years and It can be transferred if the sum is transferred to the legal heirs or nominees, as appropriate, upon the death of the account holder(s)
Eligibility for investment
● Resident Individual
HUFs and trusts are not allowed to invest in NSCs.
Advantages of investing in NSC
● Investor can avail the tax benefits under Section 80C up to the cap of ₹1.5 lakhs;
● Interest gets compounded annually but will be payable at maturity.and no TDS at time of payout (● NSC can be used as collateral for securing loans from banks
- No credit risk is involved as these are issued and backed by the Government of India
- One can make investments starting from Rs 1000 and then multiples of Rs 100 and there is no upper limit on the invested amount.
Disadvantages of NSC
● The interest rate offered is fixed. Hence, there are no real returns if they fall below the rate of inflation;
● It comes with a lock-in period of 5 years, though can be used as collateral for availing loan
Quick Overview of FRSB Vs NSC
|Entry age||No minimum entry age||No Minimum entry age|
|Investment limit||Minimum ₹1000 maximum no limit||Minimum ₹1000(multiple of rupees ₹100)maximum no limit|
|Form of bonds||electronic forms held in the bond ledger account||Physical certificate with a passbook|
|Rate of interest (current)||7.35 % and interest is payable semi-annually from the date of issue of bond||7.00% and interest is payable at the end of the tenure|
|Post maturity interest||Interest will be paid on half-yearly basis during the tenure of the bond||Will be paid after maturity|
|Tenure||7 Years||5 Years|
|Account holding categories||individual, joint and minor through a guardian, HUF||Individual, joint type and a minor through a guardian|
|Tax incentives||No specific tax benefit||Investment eligible for deduction u/s 80C of the Income-tax Act, 1961; Accretion (interest) exempt from income-tax|
FRSBs currently offer a higher interest rate than the NSCs – while NSCs offer 7.00% rate of interest payable at maturity, FRSBs currently offer 7.35% of the interest payable half-yearly. Rates once contracted at the time of investing in NSC do not change till maturity, like any other time deposit. The rate of interest on FRSB however is linked with the rate of interest payable on NSC. FRSB offers 35 basis points more than that offered by NSC. If the rate of interest on NSC goes up then the FRSB would offer a higher rate accordingly. However, the other way around would also hold good.
NSCs offer tax benefits to the investor along with a shorter lock-in period. An investor may choose to invest in any one of the above-mentioned instruments depending upon one’s preference and/ or requirements considering the lock-in period and tax benefits along with absolute returns.
What is the Tax benefit for Investors in FRSB and NSC?
If the individual invests in NSC they will get a deduction of ₹150000/- under section 80C of the Income Tax Act. Whereas there is no tax benefit if you invest in FRSB
What is the Lock period of NSC vs FRSB?
Lock in period of NSC is 5 years whereas for FRSB is 7 years.
Are floating rate savings bonds tradeable or transferable?
The Bonds shall not be tradable in the secondary market and shall not be eligible as collateral for availing loans from banks, financial Institutions, and non-banking financial companies.
Is Premature encashment available in the case of FRSB?
Premature encashment in respect of the Bonds shall be allowed for individual investors in the age group of 60 years and above.