If you’re searching for a secure investment avenue, fixed deposits (FDs) likely occupy a prominent spot on your radar, known for their reliability and stability. However, have you considered the lesser-known counterpart, quite new in the market since its inception in 2020, the ‘floating rate savings bond’?
In contrast to traditional FDs with fixed interest rates, a floating rate FD, and a fixed rate bond, floating rate saving bonds stand in between a floating rate FD and a fixed rate bond concerning the way they work.
In this blog, we will learn about the floating-rate savings bond, exploring its characteristics, mechanisms, and key considerations for potential investors.
What is a floating-rate savings bond?
The RBI has introduced a new type of debt instrument called a floating rate savings bond as of June 2020. It is an interest-bearing, non-tradeable bond, and its interest is not fixed, as the name suggests. It is floating. Its tenure is fixed for 7 years until an investor can receive the interest.
The interest rate is calculated based on the set benchmark. As it is linked to the National Savings Certificate (NSC), the interest change in the NSC will be reflected in the interest rate of FRSBs. It has a spread of over 0.35% on the NSC; hence, the interest rate of the NSC + 0.35% becomes the interest rate of FRSBs. The interest rate may vary every six months based on the change in NSC’s interest rate, which is under quarterly evaluation.
The interest is receivable semi-annually, considering that from the date of issuance, the first coupon is paid on the 30th of June, and the second coupon on the 31st of December. This instrument is taxable and is deducted at the source as per your income tax bracket.
It can be purchased by HUIs or residents with an investment minimum of Rs 1000 and has no limit to its maximum. With a tenure fixed for 7 years, senior citizens aged 60 and older can make a premature withdrawal at a specific time that is relevant to their age brackets.
The bonds are neither tradeable nor transferable. This means you can’t sell it in the secondary market or transfer it to others. But transfer is allowed to the nominee only in the event of the bondholder’s death.
Recently, the interest rate of NSC has been hiked to 7.70%; hence, FRSBs are available at an attractive rate of 8.05% as of December 31st, 2023.
Who should invest?
Since the instrument is taxable, those below the income tax slab and seniors in their retirement can leverage it for a shorter term of 2 years before the interest rate drops.
The advantage is that with an increase in the NSC interest rate, the FASB’s interest rate increases too, and the coupon is paid twice a year, meaning any increase in the interest rate in the next six months is reflected in the payout.
For instance, 8.05% is the current interest rate. Where 4.025% is paid in June and assuming the interest rate of NSC is hiked by 7.90%, which makes the FRSB’s interest rate 8.25%, you would earn a coupon of 4.225% in the next interest rate payout.
Mainly, it is backed by the government, allowing the investors to receive risk-free interest rates, which are higher than a regular FD, whose interest rate is fixed.
But with tax and non-cumulative options, both reductions in interest rates for higher-income individuals with a tax and no compounding action can turn out to be a little disappointing.
What are Corporate Bonds?
FDs available in the market
1. Regular FD
An instrument that offers a fixed, predetermined interest rate for over 7 days to 10 years is a regular FD. With a lock-in period applicable along with a penalty on premature withdrawals, banks, and NBFCs borrow the money for an interest rate from investors.
An FD with a shorter tenure will have less interest than one with a tenure of 1 year or more. The tenure and the interest rate offered differ from one institution to another and can have cumulative and non-cumulative payout options. Public banks offer 6 to 7.15% for one year, private banks offer 6 to 7.25% for one year, and small finance banks offer 6 to 8.25%.
For senior citizens above 60, FDs come with an additional benefit of 0.25 to 0.5% and tax benefits where tax is not applicable if the interest earned is not above Rs 50,000 annually.
It’s Time to Break the Bank FD Habits
2. Tax-Saving FD
Like regular FDs, tax-saving FDs have a fixed interest rate for a lock-in period of 5 years. With its benefit of eligibility for a tax deduction of up to 1.5 lakhs under the Income Tax Act of Section 80C, investors love it the most. But they don’t allow partial or premature withdrawal or even take loans against it. Also, the interest earned is taxed per your tax slab, but you can avoid showing Form 15G to the bank. But for individuals, if it exceeds more than Rs 10,000 per year, the TDS is applicable. On average, the interest rate banks offer is 5.5 to 7.75%.
3. Flexi FD
A Flexi FD combines fixed deposits and savings account features, offering a higher interest rate than flexibility for penalty-free withdrawals and not losing interest income on withdrawals on the remaining balance. Investors can customize the investment amount and tenure, enjoy auto-renewal, and access emergency loans. It’s a secure option for those seeking a balance between returns and liquidity in savings with a minimum investment limit. The interest rate for flexi FD for a year ranges from 6.25 to 6.75%.
4. Floating Rate FD
A floating-rate FD, tethered to the repo rate set by the Reserve Bank of India, directly reflects changes influenced by inflation, economic growth, and monetary policy. This linkage results in varying interest rates, introducing an element of uncertainty and risk.
Investors may benefit from higher returns if the base rate is revised upward, often adjusted quarterly by some banks. Interest payouts occur on the last quarter day, ensuring a regular income stream. Some banks offer an overdraft facility, providing access to 90% of the deposited amount within a day.
The scheme also encompasses a nomination facility, while senior citizens can enjoy an elevated interest rate, typically 50 basis points above the standard rate. Furthermore, investors have the option of premature withdrawal without penalties, contingent on specific rules set by the respective bank.
5. Corporate FD
A corporate FD offers a higher interest rate than a bank FD as it is raised by corporate or NBFCs to fund their businesses. Like an FD, the invested lump sum amount can be as low as Rs 10,000. A corporate FD gives interest to flexible tenure options the investor selects from one year to five years. These FDs offer the payout option flexibility of monthly, quarterly, and yearly, with premature withdrawals allowed but a lower penalty.
The company is rated by CRISIL, ICRA, and CARE, and ratings such as A, AA, and AAA are treated as safer. Even higher credit ratings offer an interest rate of more than 7.25% for a year, and these interest rates are fixed and unrelated to any benchmark. Senior citizens also benefit from higher interest rates, like in bank FDs.
What is a Corporate Fixed Deposit?
Comparison of Floating Rate FD with Other FDs
| Investment Option | Features | Interest Rate | Tax Benefits | Liquidity | Risk Level | Premature Withdrawal | Additional Features |
|---|---|---|---|---|---|---|---|
| Floating Rate Savings Bond | Linked to market interest rates may offer periodic rate adjustments. | Variable | No | Generally lower liquidity | Moderate to Low-risk | Limited liquidity; Premature withdrawals for senior citizens (above 60) with specific renewal brackets | Governments-backed; May have interest rate floors or caps |
| Regular FD | Fixed interest rate for a specified tenure | Fixed | No (Taxable Interest) | Limited (Premature Withdrawal with Penalty) | Low risk | Generally allowed with penalties; Terms vary by bank | Wide range of tenures and interest payout frequencies |
| Tax Saving FD | Fixed interest rate; Comes with a lock-in period for tax benefits | Fixed | Tax deductions under Section 80C | Limited (Lock-in period) | Low risk | Usually not allowed during the lock-in period; Penalties may apply | Eligible for tax deduction; Lock-in for 5 years |
| Flexi FD | Combination of FD and Savings Account; Flexible Withdrawals | Variable, often tiered | No | Flexible | Low risk | Generally allowed with conditions; Terms vary by bank | Allows partial withdrawals; interest is credited regularly |
| Floating Rate FD | Linked to external benchmarks like repo rate | Variable | No | Limited | Moderate to Low Risk | Allowed with conditions; Terms depend on the bank | Interest adjusts with market rates; Periodic revisions |
| Corporate FD | Fixed interest rates issued by corporations or NBFCs | Fixed | Taxable Interest | Varies by company | Moderate risk | Generally allowed with penalties; Terms vary by company | Credit ratings; Higher interest rates compared to banks |
The Wrap
For those who are risk-averse investors, these are all the options out there that can make decent returns but with lower risk. Compared to floating-rate FDs, a floating-rate savings bond is less risky as it is linked to NSC interest rates, while the FD is linked to repo rates that may have an impact from various other factors. While both bank FDs and corporate FDs are taxed, if you need a slightly higher interest rate, considering a corporate FD with a good credit rating and better interest rates compared to a bank FD can still be a viable choice.
While a tax-saving FD gives you a 1.5 lakh tax deduction, the interest from the FD is taxable. Flexi rate might give you the flexibility to liquidate, but systematic investing can work with greater commitments. An investor must pick the right type of investment option based on their specific goals and plan.
