What are Savings Bonds: Here are 9 key features you should know about

Pranati Deva
Updated: 14 Dec 2021, 05:13 PM IST
TL;DR.

Savings bonds are one of the safest long-term investment options available to investors. Let's look at some of its key features to know if it fits your portfolio.

Savings bonds are one of the safest long-term investment options available to investors.

Savings bonds are one of the safest long-term investment options available to investors.

Choosing the right investment option for you can be confusing and scary. With a number of options to choose from varying from equities to bonds to government schemes etc, it can be a difficult decision to make.

While equities are riskier investments, bonds and government schemes make a safer choice. One such safe investment option is savings bonds. These are convenient for people who are looking for a fixed income source. They have a fixed rate of return and hence are unaffected by the markets or the economic conditions.

Generally, bonds have a higher minimum investment limit so a number of investors do not prefer it, however, savings bonds have lower investment limits making it easier and more affordable for investors.

In 2003, the government introduced an 8 percent Savings Bond but later replaced it in 2018 with a 7.75 percent bond. It has a minimum investment of 1,000 or in multiples of 1,000 making it very affordable.

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What are savings bonds

Types

There are two options available to you while investing in a savings bond - cumulative and non-cumulative.

In the cumulative option, the interest is paid out directly at maturity. So suppose you invested 1000, you will get 1,703 at maturity. The interest amount is reinvested in bonds till maturity in this case.

While in the non-cumulative option, the interest is paid out every six months to the investor.

Let's look at the key features of this bond to decide whether it is a good choice for investment:

1) Any individual or Hindu Undivided Families can invest in these bonds. However, they are not open for investment to non-resident Indians (NRIs).

2) These bonds have a sovereign guarantee which means the agreed-upon rate of interest, currently 7.75 percent, will be paid by the government irrespective of any downtrends. At maturity, the total amount (principal + interest) will be returned to you by the government and there is no risk involved.

3) One can apply for these bonds in online as well as offline mode. A number of banks also provide this investment option. You can download a form online, or take one from their branches, fill it up and submit it.

4) The bank then starts the process and issues you a certificate of holding for proof of investment.

5) It is important to note that these bonds are NOT tax-free. The interest you get on these bonds will be added to your taxable income and taxed at your income tax rate. A TDS will also be deducted on the interest earned.

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Features of savings bonds

6) While the minimum investment limit of a savings bond is 1,000, there is no maximum limit. You can invest as much as you like.

7) While the redemption period is 7 years, premature withdrawal is allowed for senior citizens. The lock-in period decreases as the investor's age increases.

8) These bonds are non-transferrable.

9) These bonds cannot be used as collateral for loans like PPF.

Now that we know what are the basic features of a savings bond, it will be easier for you to make a decision as to whether it fits your portfolio or not.

First Published: 14 Dec 2021, 05:13 PM IST
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