The Reserve Bank of India (RBI) launched the floating rate savings bonds or FRSBs in 2020. FRSBs do not have a fixed coupon or interest rate; hence, they are called floating-rate bonds. It provides interest semi-annually and returns the principal amount at maturity, which is seven years. These bonds do not offer a premature withdrawal facility to the general public, except for senior citizens. But they will have to pay a penalty and a minimum lock-in of six years for people aged 60 to 70, a five-year lock-in for those aged 70 to 80, and a four-year lock-in for those over 80 years.

The interest on the floating rate bonds is 0.35 per cent higher than the government’s national savings certificate (NSC) at 8.05 per cent interest, effective from January 01, 2024, to June 30, 2024, payable on July 1, 2024. An individual or a Hindu Undivided Family (HUF) can invest a minimum of Rs 1,000 with no upper limit. The interest is paid half-yearly and taxable in the investor’s hands. One can purchase these bonds through the RBI’s Retail Direct portal and banks like the State Bank of India (SBI), Axis Bank, HDFC Bank, etc.

Should Senior Citizens Buy Floating Rate Bonds?

Floating-rate bonds are useful in the rising-rate scenario. The government reviews the interest rate of FRSBs every six months. For instance, when the interest rates on NSC increase, FRSB rates also increase. On January 1, 2024, RBI notified that the FRSB 2020 (T) bonds will continue to offer 8.05 per cent, 35 basis points higher than the NSC.

FRSBs could be attractive for many investors, but for those over 60, the Senior Citizen Savings Scheme (SCSS) could be a better option because it currently offers 8.2 per cent, the highest among all small saving schemes. SCSS interest rates are fixed for five years at the time of investment, whereas in FRSB, they are revised every six months. The interest income from FRSBs is taxable to investors.

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If the rates rise, FRSB could benefit from their floating rate system. However, they can be risky in a declining rate scenario. Considering the current inflation rate at 5.09 per cent, which is within RBI’s comfort zone, the reserve bank is unlikely to raise the rates. So, the principal amount will be safe in FRSB, but the interest amount is not guaranteed. Also, the premature withdrawal facility is available only to senior citizens after a minimum lock-in, and there is no loan facility either. So, choose these bonds after carefully considering all the pros and cons.