What is Floating Rate Bond?

The Government of India has launched the Floating Rate Bond 2020 scheme from July 01, 2020. The tenure of this bond will be 7 years. The interest rate on floating bonds will change every 6 months on January 1 and July 1. The minimum amount to invest in bonds will be Rs 1000 (digital mode) and maximum Rs 20 thousand in cash.
Jul 7, 2020 10:12 IST
Floating Rate Bond:Meaning
Floating Rate Bond:Meaning

To promote the habit of saving among the people of India, the government has already started many schemes. Taking a step further in this direction, the government has launched a floating rate bond scheme from July 1, 2020. 

Let us know about this scheme in this article.

In fact, the Modi government has brought this scheme because the interest rates on saving amount in banks and post offices have come down drastically recently and there was a need for a high-interest rate deposit scheme to motivate people to save. Under the new scheme, the interest of 7.15 percent will be given, which is much higher than offered by banks and post offices.

Who can purchase these bonds?

(i) A person resident in India,

(a) In his individual capacity, or

(b) In individual capacity on a joint basis, or

(c) In individual capacity on anyone or survivor basis, or

(d) On behalf of a minor as father/mother/legal guardian

(ii) A Hindu Undivided Family.

Bond's maturity period:-

Any citizen of India can invest in this scheme. After the issuance of these bonds, their duration will be 7 years, however, interest will be paid every 6 months. Interest on the purchased bonds will be paid on 1 July and 1 January i.e. the first change will take place on 1 January 2021. Premature redemption is allowed to senior citizens of certain categories.

Investment limit in bonds:-

There will be no maximum limit for investment in the Floating rate saving bonds. But a minimum bond of Rs 1000 will have to be purchased. After this, any number of bonds can be purchased in multiples of 1000 rupees. 

Keep in mind that the person holding this bond will have to pay tax because it is not a tax-saving bond, so the interest earned on this bond will be taxed. Tax will be charged according to the income tax slab of the investor. Further, TDS will be applicable on the interest income.
If these bonds are giving high returns then there are some restrictions with them like;

1. These bonds cannot be traded in the stock market.

2. These bonds cannot be used for loans from financial institutions, banks, and NBFCs, etc.

The good thing about these bonds is that the bondholder can choose his/her nominee and the bonds will be transferred to the nominee after the death of the primary bondholder.

How to invest in Floating Rate Bonds?

These bonds can be purchased from any government bank and some private banks. Private banks include; Axis Bank, IDBI Bank, ICICI Bank, and HDFC Bank.

To ensure transparency, the government has allowed the purchase of these bonds only in electronic form. These bonds will be transferred to the investor ledger account as soon as the floating bond is purchased. 

If investors want, they can also buy them with maximum cash of Rs Rs 20000. Apart from this, these floating rate bonds can also be purchased through a check, draft, and any acceptable electronic mode.

Thus, the basic objective of issuing floating bonds is to motivate people to save and promote capital formation in the country.

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