If you are a risk-averse investor looking to earn steady and stable returns, RBI Floating Rate bonds are a worthwhile alternative to bank fixed deposits. These non-tradeable bonds were first issued by the RBI in September 1995 and have a 7-year maturity. A unique feature of these bonds is that the coupon rate, or interest rate, is not fixed—it's a variable, or floating. The coupon rate is linked to or pegged at a 0.35% premium over the interest rate on the National Savings Certificate (NSC).
Recently, while reviewing the interest rates on Small Savings Schemes (SSS) for the quarter 1 April to 30 June 2026, the government considered the fact that the 10-year benchmark G-sec yield has inched up (due to elevated risk on account of the West Asia war) and kept interest rates on small savings schemes unchanged for the eighth consecutive quarter.
The NSC interest is currently 7.7% p.a., compounded annually. With a 0.35% premium over this, the RBI Floating Rate Bond offers a coupon rate of 8.05% p.a.
Compared to the term or fixed deposit rates offered by some of the top private and public sector banks, the coupon rate on RBI Floating Rate Bonds is considerably better.
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In other words, the RBI Floating Rate Bonds can help you earn a higher interest income to manage cash flow needs. Today, these bonds offer returns better than some traditional investment avenues. At 8.05% p.a., the interest is higher than even that of PPF (a very popular investment avenue).
Moreover, these bonds are safe – almost risk-free – as they are backed by the Government of India. The RBI notifies any changes in the interest/coupon rate (re-set half yearly) whenever the NSC rate changes.
How is the Coupon Rate on Bonds Paid?
The interest (currently 8.05% p.a.) is paid half-yearly to the bondholder on 1st Jan and 1st July every year. The cumulative option is not available for RBI bonds. This allows you to invest a sum that optimally meets your cash flow needs by investing accordingly.
What is the Minimum and Maximum Investment?
These bonds are issued at par at a face value of Rs 100 per bond, and the minimum investment is Rs 1,000; there is no maximum investment limit. The date of issue of the bonds is considered the date on which the funds are debited from your bank account.
Who is Eligible to Invest?
Only residents of India (aged 18 or older) may invest in RBI Floating Rate Bonds in single-name or joint names. Hindu Undivided Families (HUFs) can also invest in these bonds.
Non-Resident Indians (NRIs) are not permitted.
What Documents Are Required?
Typically, the documents needed to invest in these bonds are a duly filled and signed application form along with your address proof (viz. Aadhaar, Voter ID card, Ration Card, Passport, etc.), plus a photo and age identity proof (viz. Aadhaar, PAN Card, Voter ID,) that need to be submitted to the bank from where you buy these bonds.
Keep in mind that your bank account details are required to invest in RBI Floating Rate bonds to facilitate interest payments.
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Tax Implications of the Interest Paid
The interest on these bonds is fully taxable under the head ‘income from other sources' and taxed as per your income-tax slab. That said, this still makes sense if the net total income (after all deductions) is below the base exemption limit.
To avoid tax deduction at source, Indian residents under 60 years can furnish Form 15G or 15H, if aged 60+, to the bank from where these bonds are purchased. There is no capital gains tax, as these bonds are redeemed at face value.
Can They be Transferred or Withdrawn Prematurely?
These bonds are not tradeable and therefore cannot be transferred, except to a nominee(s)/legal heir in the event of the bondholder's death.
As regards to premature withdrawals or encashment, these are permitted after a certain age and subject to the lock-in period, as follows:
In case of joint holdings (which are permitted), at least one bondholder should meet the criteria for premature encashment. So, if you are a retiree, there is a good amount of flexibility to help you manage your liquidity needs.
That said, note that when you prematurely withdraw/encash, 50% of the interest due and payable for the last six months of the holding period shall be recovered as a penalty.
Partial premature encashment of the amount on a single application is not permitted.
To Conclude…
The RBI Floating Rate Bonds offer a host of benefits. But keep in mind that the coupon rate or interest is variable. If the coupon rate is reset downward with a change in the NSC rate, it could yield a lower return.
That said, currently, even in a downward interest rate environment, the coupon rate on these floating rate bonds hasn't gone down. These bonds continue to offer an attractive rate, higher than the bank FD rates, which is beneficial for risk-averse investors and retirees.
Moving forward, given that inflation poses a risk currently against the backdrop of the West Asia war (which has pushed up energy and fertiliser prices as well as a weak Indian rupee turning into a double whammy), and that we are almost near the bottom of the current interest rate cycle, potentially if policy rates are hiked and the 10-year benchmark yield also moves up further, the yield on the floating rate bonds could get even better.
While the returns may not be predictable and the lock-in is long, RBI Floating Rate Bonds are currently an appealing investment option. However, it is recommended to consider your broader investment objective, risk profile, and liquidity needs before investing in these bonds.
Happy investing!
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