RBI Bonds of India 2023

The RBI or the Reserve Bank of India is the banker to the central and state governments.

One of the RBI’s banker duties is to manage fund raising for the governments via government bonds or securities. This means all government bonds are RBI bonds in a way.

However, there are only a few Bonds that are called ‘RBI Bonds.’ They are:

8% Savings (Taxable) Bonds, 2003 [also called 8% RBI Bonds]
7.75% RBI Savings (Taxable) Bonds [also called 7.75% RBI Bonds]
Floating Rate Savings Bonds 2020 (Taxable) [also called FRSB 2020 (T) or Floating Rate RBI Bonds]

Floating Rate RBI Bonds replaced 7.75% RBI Bonds in 2020. The 7.75% RBI Bonds had earlier replaced 8% RBI Bonds in 2018. The 8% RBI Bonds were introduced in 2003.

In the following paragraphs, we will look at the differences among RBI Bonds and learn more about RBI Bonds.

8% RBI Bonds vs. 7.75% RBI Bonds vs. Floating Rate RBI Bonds

Attribute	8% RBI Bonds	7.75% RBI Bonds	Floating Rate RBI Bonds
Interest rate (fixed/floating)	Fixed	Fixed	Floating - linked to National Savings Certificate (NSC) rate
Interest rate (% offered)	7.75%	7.75%	NSC rate + 0.35% (7.35% as of April 2023)
Interest frequency	Twice a year. Cumulative interest option was also offered.	Twice a year. Cumulative interest option was also offered.	Twice a year. No cumulative interest option available.
Year of introduction	2003	2018	2020
Year of discontinuation	2018	2020	Not discontinued yet (as of April 2023)
Tenure	6 years	7 years	7 years
Transferable	No	No	No
Liquidity	Very illiquid, investor must hold the bond until maturity or end of lock-in	Very illiquid, investor must hold the bond until maturity or end of lock-in	Very illiquid, investor must hold the bond until maturity or end of lock-in
Lock-in	Depending on investor’s age 3 years: If age > 80 years 4 years: If age > 70 years 5 years: If age > 60 years	Depending on investor’s age 4 years: If age > 80 years 5 years: If age > 70 years 6 years: If age > 60 years	Depending on investor’s age 4 years: If age > 80 years 5 years: If age > 70 years 6 years: If age > 60 years
Available for investment? *(as of April 2023)*	No	No	Yes
Credit risk	None, backed by the RBI	None, backed by the RBI	None, backed by the RBI
Inflation risk	Yes, during periods of high inflation the bond’s return net of inflation could be very low or negative	Yes, during periods of high inflation the bond’s return net of inflation could be very low or negative	Low, since the interest rate of the bond adjusts to NSC rate which adjusts to inflation rate
Taxation on interest	Interest income taxed as per investor’s marginal income tax slab rate, TDS applicable	Interest income taxed as per investor’s marginal income tax slab rate, TDS applicable	Interest income taxed as per investor’s marginal income tax slab rate, TDS applicable
Taxation on capital gains	None, since capital gains will not be generated	None, since capital gains will not be generated	None, since capital gains will not be generated
Investment restrictions	Min: Rs. 1,000 Max: No limit	Min: Rs. 1,000 Max: No limit	Min: Rs. 1,000 Max: No limit
NRI eligibility	Not eligible	Not eligible	Not eligible
Eligible as loan collateral	No	No	No

What is the interest rate of RBI Bonds?

For the Floating Rate Savings Bonds 2020 (Taxable), the interest rate is variable and linked to National Savings Certificate (NSC) interest rate as: NSC interest rate + 0.35%.

For example: The NSC interest rate for first half of 2023 is 7% and hence the interest rate on Floating Rate Savings Bonds 2020 (Taxable) is 7.35%.

The 7.75% RBI Bonds had a fixed interest rate of 7.75% whereas 8% RBI Bonds had a fixed interest rate of 8%.

Both the RBI Bonds pay interest twice a year. However, only the older RBI Bonds (8% and 7.75% Bonds) offered a cumulative interest option. In the cumulative interest option, the investor would receive compounded interest at the end of bond’s tenure.

Who should invest in RBI Bonds?

The most notable features of Floating Rate RBI Bonds 2020 (Taxable) are:

Zero credit risk, backed by the RBI
Half-yearly interest payment
Interest rate adjusts as per inflation*
At least 4 years of lock-in

*The interest rate is indirectly linked to the inflation rate through the National Savings Certificate (NSC) interest rate.

These features make Floating Rate RBI Bonds 2020 (Taxable) perfect for investors looking to generate income while keeping their capital protected.

So, investors like business owners and retirees can invest in Floating Rate RBI Bonds to generate inflation-adjusted income and keep their capital safe.

For the older 8% and 7.75% RBI Bonds, the interest rate was fixed and it was also offered in cumulative interest option. This made them suitable even for investors who were not looking for income generation. However, it had the risk of generating low or negative returns inflation-adjusted returns during periods of high inflation.

How to invest in RBI Bonds

Since, the 8% and 7.75% RBI Bonds have been discontinued, we will discuss the investment process of the Floating Rate RBI Bonds only.

RBI Bonds are issued in electronic format and electronically and are held in Bond Ledger Accounts (BLAs).

RBI Bonds offline investment process

RBI Bonds can be purchased offline at a designated branch of one of these banks – HDFC Bank, SBI, ICICI Bank, IDBI Bank, Axis Bank, or any nationalised bank.

You will need to make an application and submit your bank account details where you want to receive the regular interest payments and initial investment back.

RBI Bonds online investment process

Online investing is always more convenient than offline investing.

RBI Bonds can be purchased from online platforms/banks like RBI Retail Direct, ICICI Bank and Axis Bank.

Taxation and withdrawal of RBI Bonds

Taxation on interest of RBI Bonds

The following is applicable to all the 3 RBI Bonds.

RBI Bonds pay interest twice a year. These interest payments are subject to tax at your marginal income tax slab rate.

So, if you are in the 30% tax bracket, you will have to pay 30% tax on the interest payments you receive from the RBI Bonds.

Taxation on capital gains of RBI Bonds

The following is applicable to all the 3 RBI Bonds.

RBI Bonds can be purchased at face value and once they mature, you sell them back to the RBI at face value. So, no capital gains (or losses) are generated.

Further, these bonds are not transferable so you can’t sell them to someone else at a profit too.

So, there is no scope for investors to generate capital gains from RBI Bonds.

Withdrawal of RBI Bonds

The following is applicable to Floating Rate RBI Bonds (introduced in 2020) and 7.75% RBI Bonds (introduced in 2018 and discontinued in 2020).

The two most recent RBI Bonds have a lock-in period of 7 years for investors under the age of 60. However, senior citizens have shorter lock-in periods depending on their age:

Investor age	Lock-in period
60-69 years	4 years
70-79 years	5 years
80+ years	6 years

The following is applicable to 8% RBI Bonds (introduced in 2003 and discontinued in 2018).

The oldest RBI Bonds had a lock-in period of 6 years for investors under the age of 60. However, senior citizens have shorter lock-in periods depending on their age:

Investor age	Lock-in period
60-69 years	3 years
70-79 years	4 years
80+ years	5 years