RBI Discontinuing 7.75 – Saving Bonds

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WHAT ARE 7.75 PER CENT RBI BONDS?

The 7.75 bonds 2018 were issued with effect from January 10, 2018 and were available for subscription to resident citizens/HUF to invest in a taxable bond.
While one bond was of Rs 1,000 each, the bonds had no maximum limit for investment.
The bonds had a 7-year lock-in period from the date of issue, but, it permitted premature encasement to individuals who were 60 years and above.
Interest on these bonds will be taxable under the Income-tax Act, 1961.

The government has withdrawn these bonds with effect from Friday and therefore it will not be available for investors to invest.
This means it is only ceasing fresh issuance and not redeeming those already invested.

Investment advisors say that while it was mostly used by HNIs to invest,
The demand for RBI bonds went up significantly over the last couple of months as investors turned risk averse.

As the 75% RBI bonds were taxable instruments, the interest income on it would be taxable at the marginal tax rate.

For those having income of over Rs 5 crore and having interest income from these bonds, the return would be 44%.
For those falling in the tax bracket of 30 per cent, the return from these bonds would stand at 5.4%.
For those falling in the lowest tax bracket of 10 per cent, the post-tax return would be 975%.

The interest rates have been on a decline since the global growth rate projections have been brought down following the spread of coronavirus Pandemic.
The Reserve Bank of India first announced a 75 basis point cut in repo rate on March 27, 2020 to 4.4% and then again announced a cut in repo rate by 40 basis points to 4% on May 22.
A cut in repo rates not only reduces the rate at which commercial banks borrow from RBI but also leads to a cut in deposit and lending rates for banks.