The Reserve Bank of India (RBI) has fixed the interest rates of its floating rate savings bonds (FRSB) at 7.50 per cent, effective from January 1, 2025, to June 30, 2025. These bonds are taxable but guarantee the interest. The rates remained unchanged from last year. According to the RBI notification dated January 1, 2025, “The coupon rate on FRSB 2020 (T) for the period January 01, 2025, to June 30, 2025, and payable on July 1, 2025, remains at 8.05% (7.70%+0.35%), unchanged from the previous half-year”.

The rates are reviewed and reset every half-year for January 1 to June 30, and July 1 to December 31. The rates are directly linked to the National Savings Certificate (NSC) and are set at 35 basis points (BPS) higher than the NSC rates. At present the NSC rate is 7.70 per cent, so the FRSB rate is (7.70+0.35) 8.05 per cent. Like NSC, it also has a lock-in period of seven years.

RBI’s Floating Rate Savings Bonds: 

• One can buy these bonds individually or jointly. The person must be a resident Indian

• These are allowed to be purchased on behalf of a minor also by the parents or a legal guardian

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• A hind undivided family (HUF) can also invest in these bonds

• The minimum amount to invest in FRSB is Rs 1000. There is no limit on the maximum amount

• The lock-in period is seven years, which means investors cannot withdraw money before the tenure is complete

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However, senior citizens are allowed to withdraw prematurely after completing the minimum holding period, which varies depending on their age.

• The minimum holding period for seniors in the age bracket of 60-70 years is six years

• For seniors in the age bracket of 70-80 years, it is five years

• For seniors aged 80 years and above, the limit is four years

These bonds are linked to the NSC in terms of interest rate but these are not like NSC. Further, there is no tax benefit in investing in FRSB. The interest amount paid is chargeable to tax for investors according to their income tax slabs. Moreover, the investors have to pay a penalty of 50 per cent on interest on premature withdrawal, which is collected from the interest due and payable for the last six months from the payment date. 

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Should You Invest In FRSB?

While the small savings schemes’ interest rates remain the same for the last quarter of FY2024-25 (January to March 2025), FRSB offering 8.05 per cent interest for seven years may be considered.

If one has a long-term time horizon of five years or more, senior citizens senior citizens savings scheme (SCSS) is the first option that comes to mind. SCSS offers an attractive 8.2 per cent interest, but there is a limit of Rs 30 lakh per head on SCSS investments, which includes both single and joint accounts. The SCSS tenure is five years, whereas FRSB has a lock-in of seven years. There are bank fixed deposits as well, offering interest in the range of 7-9 per cent; however, interest from all these instruments is taxable.

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One important point is the interest rate scenario an investor may consider. As these are floating rate bonds, reset semi-annually, these could generate good returns in the rising rates environment than when the rates are going down.

So, consider the amount to be invested, period of lock-in, tax liability, and ultimately your risk appetite before deciding to invest in FRSB or other investment instruments.