RBI Floating Rate Bonds: Complete Guide to Interest, Tax Rules, Eligibility and Key Benefits

To offer retail investors a safe debt investment option, the Government of India introduced the RBI Floating Rate Savings Bonds. These bonds are linked to the interest rates of government-backed small savings schemes, making them a dynamic and secure choice for conservative investors. Launched in 2020 as a replacement for the 7.75% taxable bonds, these instruments come with several conditions that every investor must understand to avoid unpleasant surprises.

From eligibility rules and interest payouts to taxation and premature withdrawal clauses—here is a complete breakdown of everything you need to know about RBI Floating Rate Bonds.

Who Can Invest in These Bonds?

The RBI Floating Rate Savings Bonds are exclusively available to individuals and Hindu Undivided Families (HUFs). This means that entities such as companies, trusts, and partnership firms cannot invest in them.

Only residents of India, as defined under the Foreign Exchange Management Act (FEMA), are permitted to apply. As a result:

• NRIs and PIOs cannot invest in these bonds.

• Indian citizens who are employed or conducting business abroad are also not eligible.

However, there is one exception:
If an investor buys the bond while being a resident and later becomes an NRI under FEMA rules, they can continue holding the bond till maturity. They are not required to sell or prematurely redeem it.

Parents or guardians may invest on behalf of minor children. The bonds may be purchased individually or jointly. Joint applications can be held either jointly or on an “either or survivor” basis.

Nomination Facility

Investors can nominate one or more persons to receive the investment amount in case of their death. Nominations can be changed or canceled anytime. However:

• Nomination is not allowed if the bond is held by a minor or a HUF.

Face Value, Tenure and Interest Rate Structure

Each RBI Floating Rate Bond has a face value of ₹1,000, and investors may purchase any number of units—there is no upper limit.

The bond has a seven-year maturity period, after which it is automatically redeemed. Interest is paid every six months, with the first interest credit made on the next January 1 after issuance.

One key feature is that there is no cumulative option. Interest is always paid out and cannot be reinvested within the bond.

How the Interest Rate Is Determined

Unlike the older 7.75% fixed-rate bonds, these bonds have a floating interest rate, revised every six months.

The rate is calculated as:

NSC interest rate + 0.35% premium

For example:

• Current NSC rate: 7.70%

• Add 0.35% premium

• Total interest on the bond: 8.05%

This makes the bond highly responsive to changes in government savings scheme rates.

Taxation and TDS Rules

The interest earned on RBI Floating Rate Bonds is fully taxable. There are no tax deductions or exemptions available under any section.

TDS is deducted on every interest payment. However, investors may submit:

• A nil TDS certificate,

• A lower deduction certificate, or

• Applicable Form 15G/15H,

to ensure reduced or no TDS, provided they meet the eligibility criteria.

If the investment amount is borrowed, the interest paid on that loan can be claimed as an expense deduction under certain income heads.

How to Buy the Bonds

The bonds can be purchased both online and offline. They are available through:

• SBI and 11 other public sector banks

• ICICI Bank

• HDFC Bank

• Axis Bank

• IDBI Bank

Each bank has specific branches assigned for bond applications. Investors may apply at any time of the year, as there is no last date for subscription.

Payments up to ₹20,000 can be made in cash; higher amounts must be paid via cheque, demand draft, or digital modes. Since interest and maturity amounts are credited directly to the investor’s bank account, providing bank details is mandatory.

Transferability and Premature Withdrawal Rules

These bonds cannot be transferred or traded on the market. They also cannot be used as collateral for loans.

Premature redemption is generally not permitted, except for senior citizens:

• Age 60–70: Withdrawal allowed after 7 years

• Age 70–80: Withdrawal allowed after 5 years

• Age 80+: Withdrawal allowed after 4 years

Early redemption is processed only on the next interest payout date—January 1 or July 1—with a penalty equal to 50% of the last six months’ interest.

For joint holders, the age of the older holder determines eligibility. Premature withdrawal is not allowed for HUF-held bonds.