8% government of India Savings Bond make a comeback

8% government of India Savings Bond make a comeback

A fixed income product floated by the government that was ignored by investors for almost five years is back in demand. Fixed income investors are flocking to the government of India (GOI) Savings Bonds, 2003 since April 1, post the reduction in interest rates on small savings and post office time deposits were lowered. With interest rates expected to soften further, investors are locking their money in these bonds that offer 8% returns annually.

"GOI bonds pay a little more than post office time deposits and bank deposits. They are very safe since they are issued by the government of India, and hence there are increased enquiries and investments into these bonds, over the last couple of weeks," says Anil Chopra, Group CEO, Bajaj Capital.

Before the rate cut on small savings and post office time deposits were announced, a 5-year time deposit from the post office paid 8.5% every year. From April 1, the same deposit fetches 7.9%. Other comparable products such as fixed deposits from banks like SBI and HDFC Bank pay a maximum of 7.5%, while Bank of Baroda pays 7.3% and foreign banks like HSBC pay 7.25%.

Given that these government bonds pay 8%, which is higher than competing products, smart investors are locking themselves onto these bonds. The bonds have a tenure of six years and investors can choose to take interest either on a half yearly basis or on a cumulative basis at the end of the tenure.

In the last five years, this product was out of favour because post office time deposits and banks paid higher than 8% in a higher interest rate regime. Wealth managers said with rates expected to decline, investors want to lock in their money for six years.

Interest income from these bonds, however, are taxable. Investors are liable to pay tax depending on his tax slab. Tax deducted at source (TDS) will be applicable if interest from this instrument earned is more than Rs 5,000 in a financial year. Unlike tax free bonds, the Bonds are illiquid and shall not be tradable in the secondary market and will not be eligible as collateral for loans from banks, financial Institutions.

Source:BankingUpdates