In the scenario where Interest rates on Bank Fixed Deposits and Small Savings Scheme are moving downward quarter-on-quarter and no tax-free bonds on the offering, there are not many investment options available which provide assured return and that too without any risk. Investors in these times can look for GOI bonds.
GOI bonds have got a revision in both interest rates and tenure. The new GOI bonds come with interest rates of 7.75% p.a. (earlier 8% p.a.) and tenure of 7 years (earlier 6 years).
Let’s go through with the features and taxability of GOI Bonds before considering for investment.
Who can invest in GOI Bonds?
Only Indian Resident, Either in their Individual Capacity or Jointly can invest in GOI Bonds. Parents or guardian can also invest on behalf of a minor. However, Non-Resident Indians cannot invest in the scheme.
In case the investment is made in Joint Names, the bonds and all the payment orders will be issued in the name of the first applicant.
Limit of Investment
There is no upper limit of investment in GOI bonds, however, Rs.1,000 is the minimum amount to be invested.
Interest Rates on GOI Bonds
GOI bonds come with a cumulative and non-cumulative options, bearing interest of 7.75% p.a. Under the cumulative option, the interest is compounded on a half-yearly basis and will be paid along with the principal at the time of maturity. While under non-cumulative option, interest is payable on a half-yearly basis from the date of issue. The payment date of interest under a non-cumulative basis is 1st August and 1st February of each year.
The interest amount will be credited electronically to the bank account of the Investors on the predetermined date. However, the facility of payment of interest and principal through demand draft free of cost or at par cheques is also available.
The maturity value under cumulative option will be ₹ 1,703 (being principal and interest) for every ₹ 1,000 invested in GOI Bonds. However, no shifting from cumulative to non-cumulative option or vice-versa is allowed in the midterm.
How to Invest in GOI Bonds?
In total there are 23 banks or receiving offices are specified by Finance ministry which includes designated SBI branches and associate banks across India, 18 nationalized banks, 3 private banks and the stock holding corporation of India.
You will have to fill up “Revised Form A” either electronically or physically.
Taxability of GOI Bonds
According to the Income Tax Act 1961, the interest received on GOI bonds is will be added to the investor’s income under the head of other income and taxed as per the applicable slab rate.
TDS will be deducted when the interest is paid under the non-cumulative option. While under cumulative option TDS will be deducted from the accumulated interest portion of the maturity proceed at the time of maturity.
Please note that TDS is deducted at 10% from interest above ₹ 40,000 (₹ 50,000 in case of senior citizens). If the investors fall in the tax bracket of above 10% then he needs to pay remaining tax on a self-assessment basis.
Redemption and Early Exit
GOI Bonds come with a tenure of 7 years from the date of Issue. However, one can go for premature redemption as indicated below:
- Age 60 years to 70 years: Lock-in-period shall be 6 years from the date of Issue.
- Age 70 years to 80 years: Lock-in-period shall be 5 years from the date of Issue.
- Age 80 years and above: Lock-in-period shall be 4 years from the date of Issue.
- No premature withdrawal is allowed by a person aged below 60 years.
Please note that while making the premature withdrawal documents relating to age-proof i.e. date of birth is required to be submitted.
In the case of the joint holder or more than two holders, the premature withdrawal condition gets activated in case any holder falls the above age bracket.
After the stipulate lock-in-period gets over, an investor needs to surrender the bonds to get the maturity proceeds. The government will not provide any interest in postmaturity.
In case of premature withdrawal, redemption proceeds will be paid on half yearly intervals i.e. on 1st August and 1st February every year. However, 50% of interest due and payable for the last six months of the holding period will be deducted from the proceeds in such cases, both in respect of Cumulative and Non-cumulative bonds.
One or more than one Nominee can be nominated including Non-Resident Indian but in case of NRI being Nominee, any payment related to interest or maturity will subject to the foreign exchange rules prevailing at the time of remittance. The nomination is done on survivor basis i.e. in case two nominees are nominated and one dies before the maturity then the surviving nominee will get the proceeds.
The nomination can be changed anytime and many times as and when required by filing Form B (new nomination) / Form C (cancelling of existing nomination). However, no nomination can be made when the investment is made in the name of the minor
- GOI bonds are mandatorily issued in Demat form and are not transferrable.
- These bonds are not tradeable in the Secondary Market.
- GOI Bonds are not eligible as collateral security for a loan from banks or any other financial institutions.
Why Invest in GOI Bonds?
The current interest rates offered by Banks on fixed deposits is somewhere between 6% to 7% for a tenure of 7 years. And most of the small savings schemes are getting downward revision each quarter. Currently, Post-Office monthly income scheme and senior citizen savings scheme gives a return of 7.50% p.a. and 8.40% p.a. but both have a ceiling limit of ₹ 4.50 lakh (POMIS) and ₹ 15 lakhs (SCSS). In case you have exhausted your limits in these investment schemes and wishes to earn risk-free returns better than bank fixed deposits then you are left with the option of investing in GOI Bonds.