8% RETURNS ON OFFER In a falling interest rate scenario, investors should lock into longer tenure products
Investors may lock in a portion of their money in the government's savings bonds, which return 8% with rates across fixed income instruments on the decline. The Reserve Bank of India on Tuesday slashed the repo rate by 25 basis points, taking the total rate cut tally since January 2015 to 175 basis points. One percent equals 100 basis points. Interest rates on small savings instruments have been reduced a couple of times already in this calendar year.
For retirees and other investors living on interest income from deposits, financial advisors said the government savings bonds, which have a tenure of six years for small investors, make sense.
In a falling interest rate scenario, investors should lock into longer tenure products. He said it is the only product left where the government has not yet cut interest rates. This government bond scores over bank deposits as it pays higher interest. For instance, banks like State Bank of India and HDFC Bank now pay 7% and 7.25% for a 5-7 year fixed deposit, while the post office time deposit pays 7.8%. Investors can choose to take interest either on a half yearly basis or on a cumulative basis at the end of the tenure.
It is a matter of time before banks further reduce their deposit rates. Even small savings rates will head downwards, though the cuts could be smaller and more frequent. 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 ap plicable if interest from this instrument earned is more than Rs 5,000 in a financial year.
Unlike fixed deposits, where you can rush to the bank to get your money back, these 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.
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