Was looking at fixed income options for a lump sum sitting in a savings account. Stumbled on RBI Floating Rate Savings Bonds. Current rate is 8.05% for the January to June 2026 period, government-backed, no credit risk. Yet almost nobody in my circles knows these exist. Curious if anyone here holds them and what the actual experience is like.
I have held these since 2021. The concept is straightforward. The interest rate is not fixed, it resets every six months on January 1 and July 1, and it is always 0.35% above the prevailing NSC rate. So right now NSC is at 7.70% and these bonds pay 7.70 plus 0.35 which is 8.05%. If NSC goes up your rate goes up. If NSC goes down your rate goes down. The sovereign guarantee is complete. I have never had a moment of concern about the principal. The interest lands in my bank account twice a year like clockwork.
8.05% from government is actually insane compared to savings account. what’s the catch
Two things. First, the lock-in is 7 years. No exit for general investors before maturity. You cannot sell these, trade them, or pledge them as collateral. Senior citizens above 60 have an early exit option but with a penalty of 50% of the last six months of interest. If you need the money before 7 years you simply cannot access it. Second, the rate floats downward too. If NSC rates fall this bond pays you less. Not a risk people are used to thinking about with government instruments.
okay so if RBI cuts rates further this year the bond yield drops automatically in July?
Not directly tied to the repo rate but indirectly yes. The reset formula is NSC rate plus 0.35%. NSC rates are set by the Finance Ministry and tend to move with the broader rate environment, though they are stickier than repo rate movements. The current NSC rate of 7.70% has been unchanged since late 2023 even through the RBI’s 125bps of cuts. So there can be meaningful divergence. That said, a sustained easing cycle would eventually pull NSC rates lower, which would pull this bond’s yield down too. Whether and when that happens is uncertain.
Tax note. Interest is fully taxable at your income slab rate. TDS is deducted if your annual interest from this instrument exceeds Rs 10,000. On Rs 1.25 lakh invested the annual interest is roughly Rs 10,063, just above the threshold. Plan the investment size accordingly. No capital gains tax applies since redemption is always at face value.
the comparison that matters is not savings account vs this. it’s G-Sec vs this. a 7-year G-Sec currently yields around 6.9%. this bond at 8.05% is yielding 115bps more with the same sovereign guarantee. the difference is liquidity – G-Secs can be sold in the secondary market, this bond cannot. for someone who genuinely does not need the money for 7 years and wants sovereign safety at the best available rate, this is actually the more rational choice right now. the 8.05% is real, the comparison just needs to be made honestly.