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Tuesday, January 03, 2006

RBI Taxfree Bonds

RBI Bonds are tax saving bonds that have a special provision that allows the investor to save on tax. These Bonds are instruments that are issued by the RBI, and currently has two options – one carrying an 8% rate of interest p.a., which is taxable and the other one carries a 6.5% (tax-free) interest p.a. The interest is compounded half-yearly and there is no maximum limit for investment in these bonds. The maturity period of the 8%(taxable) bond is 6 years and that of the 6.5%(tax-free) bond is 5 years. Application forms for RBI Bonds are available and accepted at all branches of the Reserve Bank of India, designated branches of the SBI, and designated branches of nationalised banks across the country.
· INVESTMENT:
· The minimum investment on RBI Savings Bonds is Rs 1,000. You can apply in multiples of Rs 1,000 thereafter. There is no prescribed upper limit to your investment in this instrument.
· INTEREST RATES:
· Under the cumulative option of the 6.5%(tax-free) RBI Relief Bond issued at a face value of Rs 1,000 would be redeemed at Rs 1,377 on maturity (after 5 years). And in case of the cumulative option of the 8% (taxable) RBI Relief Bond issued at a face value of Rs 1,000 would be redeemed at Rs 1,601 on maturity (after 6 years).
You can opt to receive interest either on a half-yearly basis or on maturity of the instrument, along with the principal invested. If you opt to receive interest on a half-yearly basis, you will receive interest every six months from the date of issue of the bond up to 30th June or 31st December, whichever is earlier. Interest is paid on 1st July and 1st January each year.
· MATURITY: · The period of holding of 6.5 per cent (tax-free) RBI Relief Bond is 5 years from the date of issue. And for the 8 per cent (taxable) RBI Relief bond, the maturity period is 6 years. The bonds are repayable on the expiration of the maturity.
· PREMATURE WITHDRAWL: · While the 8 per cent taxable Savings Bond cannot be redeemed prematurely and must be held for the entire duration (6 years), the 6.5 per cent tax-free Savings bond can be redeemed before the maturity period of 5 years. In this case, after a minimum lock in period of 3 years from the date of issue, an investor can surrender the bond any time after the 6th half year but redemption payment will be made on the following interest payment due date. Thus the effective date of premature encashment will be 1st July and 1st January every year. However, 50% of the interest due and payable for the last six months of the holding period will be recovered in such cases both in respect of cumulative and non-cumulative Bonds.
· LOAN FACILITY:
· RBI Savings Bonds are not eligible as collateral for loans from banks, financial institutions and Non-Banking Financial Company (NBFC) etc.
· TRANSFERRABLE: · RBI Savings Bonds are not tradable in the secondary market. The Bonds in the form of Bond Ledger Account and Stock Certificate are not transferable except by way of gift to a relative by execution of appropriate Transfer Form and execution of an affidavit by the holder.
· DETERMINATION OF MARKET VALUE OF RBI Savings Bonds: · Market value of RBI Relief Bonds is determined on the basis of prevailing (6.5 per cent and 8 per cent, as applicable) interest rates and market conditions.
· MODE OF HOLDING: · RBI Savings Bonds can be held at the credit of the holder in an account called BLA or in the form of PN. The bond can be held in demat form, i.e., a certificate of holding will be issued to the holder of bonds in the BLA. The bonds in the form of BLA are issued and held with the public debt offices of the RBI or any branch of a scheduled bank authorized by the RBI. The bonds in the form of PN are issued only at the offices of RBI. However, bonds issued in one form will not be eligible for conversion into the other.
· TAX IMPLICATIONS: · In case of the 6.5 per cent RBI Savings Bond, the interest received is completely exempt from income tax as per the provisions of the Income Tax Act, 1961. But, In case of the 8 per cent RBI Savings Bond, the interest will be taxable under the Income-Tax Act, 1961 as applicable according to the relevant tax status of the bondholder. RBI Savings Bonds are exempt from Wealth Tax. However, there is no tax benefit on the amount invested in these bonds.

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