What is a floating rate bond?

 

To promote the trend of saving among the people in India, the government has already started many schemes. Taking a step further towards this scheme, the government has started floating rate bond scheme from July 1, 2020. In fact, the Narendra Modi government has come up with this scheme because the interest on deposit amount in banks and post office has come down drastically and there was a need for a high-interest deposit scheme to motivate people to save. Under this scheme, 7.15 per cent interest will be given, which is much higher than banks and post offices.

 

Some key features of floating rate bonds

 

1. Unlike general bonds that pay a fixed rate of interest, floating rate bonds have a variable rate interest.

 

2. The floating rate bond's interest rate is tied to a benchmark rate and is reset at regular time intervals.

 

3. The interest rate risk in floating rate bonds is reduced to a great extent because these bonds will pay higher returns when the prevailing rates are higher.

 

4. There is no certainty in the future stream of income when invested in floating rate bonds.

 

5. The best time to buy floating rate bonds is when interest rates are low and expected to rise.

 

Who can buy this bond? A person residing in India, on the basis of his/her personal capacity, or on a joint basis in a personal capacity, or on behalf of a minor as father/mother/legal guardian, or Hindu undivided family.

 

Bond's maturity period? Any citizen of India can invest in this scheme. After the issuance of these bonds, their duration will be 7 years, however, interest will be paid every 6 months. Interest on bonds purchased on July 1st will be paid on January 1st, ie the first change will be on January 1, 2021. Senior citizens of certain categories are allowed premature redemption.

 

Floating rate saving bonds can be purchased for any amount but a minimum bond of Rs 1000 will have to be purchased. After that, any bond can be purchased in a coefficient of Rs 1000. That is, there will be no maximum investment limit in these bonds. But only up to 20 thousand bonds can be purchased in cash.

 

Keep in mind that the person holding this bond will have to pay tax because it is not a tax-saving bond, so tax will be levied on the interest received on this bond. Tax will be charged according to the income tax slab you will come across. Also, TDS will be applicable to interest income.

 

If these bonds are giving high returns then there are some restrictions with them like; These bonds cannot be traded in the stock market, these bonds cannot be loaned from financial institutions, banks and NBFCs etc. The good thing about these bonds is that the bondholder can make someone the nominee of these bonds and the bonds will be transferred to the nominee after the death of the bondholder.

 

Investors in these bonds can be purchased from any government bank and some private banks. Private banks include; ICICI Bank, Axis Bank, IDBI Bank, and HDFC Bank. For transparency, the government has allowed the purchase of these bonds only in electronic form. These bonds will be transferred to the investor ledger account as soon as the floating bond is purchased. If investors want, they can also buy them with maximum cash of Rs 20 thousand. Apart from this, these floating rate bonds can also be purchased through check, draft and electronic payment mode.