Context

• Recently, The Government of India (GoI) has announced the Sale (Re-issue) of ‘‘GoI Floating Rate Bonds, 2028’ through price based auction using uniform price method.

What are Floating Rate Bonds (FRBs)

• Floating Rate Bonds bonds are fixed income instruments offered by the Government of India which come with a lock-in period.
• Unlike regular bonds that pay a fixed rate of interest, floating rate bonds have a variable rate of interest.
• The rate of interest of a floating rate bond is linked to a benchmark rate and is reset at a regular interval.
• The interest rate risk is largely mitigated as these bonds will pay higher return when prevailing rates are high.
• There is no certainty of the future stream of income when investing in a floating rate bond.
• The best time to buy floating rate bonds is when rates are low and are expected to rise.
• The FRBs are not listed on any secondary exchange which means that it does not offer any interim exit to the investor.
• The FRS bonds are a 100% risk free investment option as interest payments on these are guaranteed by the Government of India.

How are the FRBs taxed?

• The interest earned on FRBs will be taxed as per the existing tax slab.
• Although TDS will be deducted on interest payment similar to an Fixed Deposit, the same can be claimed back while filing Income Tax returns.

Eligibility criterion for FRBs

• All residents of India and Hindu Undivided Family (HUF) are eligible to invest in FRBs.
• The minimum amount that a person can invest is INR 1,000 and in multiples of INR 1,000 thereof and there is no cap on investments that a person can make.
• A Non-Resident Indian (NRI) cannot invest in the scheme.

Bonds and FRBs

• Unlike regular bonds that pay a fixed rate of interest, floating rate bonds have a variable rate of interest.
• The rate of interest of a floating rate bond is linked to a benchmark rate and is reset at a regular interval.
• Interest rate risk is largely mitigated as these bonds will pay higher return when prevailing rates are high.
• There is no certainty of the future stream of income when investing in a floating rate bond.
• The best time to buy floating rate bonds is when rates are low and are expected to rise.

Source: PIB

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