What , How and Why of 8% RBI Relief Bond in seven steps?


Once upon a time , the relief bonds issued by Reserve Bank of India used to be tax free with quite handsome amount of interest . So , overall that was quite hassle free ( on account of tax exempt status) investments.

Update as on 9/09/2013 : Premature encashment allowed now !

But , now the bonds are not only taxable but also subject to tax at source. The interest @ 8 % cumulative is also very competitive .these bonds can neither be transferred or traded nor can be used as collateral for loan The only reason why one should invest is the risk free status of RBI bond. So , those who want to invest should read the details of these bonds given below

1. What is tenure of bond ?

The bond is issued for six years.

2. Who can invest ?

Individual or Individual on behalf of minor . The bond can be bought on joint name also.HUF can also buy the bond.

However, Non Residents are not allowed to buy.

3. How much can be invested ?

There is no upper limit.

4. What is interest rate and how is it computed?

Interest rate is 8% per annum. The bonds are of two types – Cumulative and non-cumulative.In both case , interest is paid every six months, but In cumulative , interest is reinvested in the bonds. The accrued amount is received at the end of tenure of bond.Thus , The maturity value of the cumulative bonds of Rs 1000  would be Rs.1,601 .

5. What about taxation on interest?

The interest is taxable and there will be tax at source for interest exceeding Rs 10,000 in  a year. However, you can file Form 15G or 15 H as the case maybe , if you want that tax is not deducted at source. Read about 15G or 15H here.

However, there is no wealth tax on these bonds.

On ‘cumulative’ type of investments, if the interest is credited every year, tax deduction has to be made if the interest credited during the financial year exceeds the threshold limit of Rs. 10,000/-. Thus, in the case of ‘cumulative’ type of investments, though the interest is payable on the date of maturity, tax deduction is still to be made whenever the interest credited or paid exceeds the threshold limit during the financial year.

6. Can you transfer the bond to any one?

No, these bonds can neither be transferred or traded nor can be used as collateral for loan. However, nomination facilities are available.

7. When can you buy theses bonds?

You can buy these bonds at any time from RBI counters.