The Reserve Bank of India (RBI) has been on a rate-cutting cycle, squeezing fixed deposit returns and creating a dilemma for investors seeking consistent and assured income.
With the latest 25 basis point cut announced at the December policy meeting, the RBI has lowered the repo rate to 5.25% from 5.50%. In response, banks have steadily reduced fixed deposit rates. Currently, most large banks offer interest rates of 6.50%-7.00% on fixed deposits with tenures ranging from one to five years.
Over the past year, fixed deposit rates across banks have fallen by 1.00%-1.50%. Against this backdrop of declining yields, the Floating Rate Savings Bond, 2020 (Taxable) is offering an interest rate of 8.05% per annum—raising the question: can it serve as a viable alternative to fixed deposits?
What is the Floating Rate Savings Bond?
The Floating Rate Savings Bond, 2020 (Taxable) is a bond issued by the Central Government, with a floating interest rate linked to the National Savings Certificate (NSC) interest rate. It currently pays an interest rate of 8.05% pa, and has the highest safety as it is issued by the Central Government. In short, it is referred to as FRSB, 2020(T). The bond’s tenure is seven years.
Any individual who is resident in India can apply for the bond. The investment minimum amount is ₹1,000 and in multiples thereof. There is no maximum limit on the amount an individual can invest in the bonds.
interest
The FRSB, 2020(T) interest rate is linked/pegged to the prevailing interest rate on the National Savings Certificate (NSC). The bond interest rate has a spread of (+) 35 basis points over the respective NSC interest rate. Currently, the interest rate payable on NSC is 7.70% pa (Jan to Mar 2025). Hence, the interest rate on the FRSB, 2020(T) is 8.05% pa (NSC interest rate 7.70% + 0.35% spread).
The interest rate on the FRSB, 2020(T) is reset half-yearly on every 1st January and 1st July, based on the prevailing NSC interest rate on 1st January and 1st July, with a spread of (+) 35 basis points. As the interest rate on the FRSB, 2020(T) is subject to change on a half-yearly basis, based on the prevailing NSC interest rate, it is a floating interest rate product.
As and when the NSC interest rate is revised upward, the interest rate on the FRSB, 2020(T) is revised upward. Similarly, as and when the NSC interest rate is revised downwards, the interest rate on the FRSB, 2020(T) is revised downwards. As mentioned earlier, the interest rate on the FRSB, 2020(T) is reset on 1st January and 1st July every year.
The interest on the FRSB, 2020(T) is paid at half-yearly intervals on 1st January and 1st July. For example, the interest amount for the period 1st January to 30th June is paid on 1st July. Similarly, the interest amount for the period 1st July to 31st December is paid on 1st January. There is no option to pay interest on a monthly, quarterly, annually, or cumulative basis.
tax treatment
The half-yearly interest amount is credited to the bondholder’s bank account. The interest amount payment is subject to Tax Deduction at Source (TDS). The tax will not be deducted if the bondholder has made a declaration of tax exemption.
The interest earned on the bond is taxable. The interest amount is added to the individual’s income and taxed as per the individual’s tax slab.
Application
An individual can apply for the FRSB, 2020(T) by submitting the duly filled application form online or in physical format at the authorized branches of:
- State Bank of India
- Bank of Baroda
- Bank of India
- Bank of Maharashtra
- Canara Bank
- Central Bank of India
- Indian Bank
- Indian Overseas Bank
- Punjab National Bank
- Punjab & Sind Bank
- Union Bank of India
- UCO Bank
- HDFC Bank
- ICICI Bank
- IDBI Bank
- Axis Bank
The application must be submitted along with the payment. The payment can be made by cheque, draft, cash (up to Rs. 20,000), or any electronic mode acceptable to the bank. The bonds are issued to the bondholder in electronic format and are credited to the investor’s Bond Ledger Account (BLA). The bondholder will be issued a certificate of holding as proof of subscription.
The bondholder can nominate one or more persons as nominees by submitting Form C. A new nomination can be made, or an existing nomination can be canceled by submitting Form D.
trading of bonds
The FRSB, 2020(T), is not tradable in the secondary market. They are not eligible as collateral for availing loans from banks, financial institutions, and NBFCs. The bonds cannot be transferred, except to the nominee(s) / legal heir(s), in the event of the bondholder’s death.
Repayment
The bonds are repayable on completion of the seven-year tenure from the date of issue. Premature encashment is allowed only for individuals aged 60 years and above, subject to certain conditions. On maturity, the redemption amount is credited to the bondholder’s bank account.
Should you invest in FRSB, 2020(T)?
As mentioned earlier, most big banks are currently paying interest rates of 6.50% to 7.00% on fixed deposits with a tenure of 1 to 5 years. In the last one year, the RBI has reduced the Repo Rate by 125 basis points, from 6.50% (Jan 2025) to 5.25% (Dec 2025).
Following the RBI’s repo rate cuts, banks have also cut interest rates on their fixed deposits. Compared to the current interest rates of 6.50% to 7.00% on bank fixed deposits, the FRSB, 2020(T) offers a better interest rate of 8.05%. Based on interest rate comparison, the FRSB, 2020(T) comes out as a better investment product.
Also, if we look at the history of the NSC interest rates, the Government has held the NSC interest rates steady at 7.70% for the last three years (from Apr 2023 to Mar 2026). However, there is no guarantee that the Government will not cut interest rates in future.
You need to bear in mind that the FRSB, 2020(T) is a floating interest rate product. If the Government decides to cut the interest rates on the NSC in future, the interest rate on the FRSB, 2020(T) will also move lower. Also, the investment tenure of the FRSB, 2020(T) is seven years with low liquidity. An investor must consider these factors when deciding whether they should invest in the FRSB, 2020(T).
Gopal Gidwani is a freelance personal finance content writer with 15+ years of experience. He can be reached on LinkedIn.
Disclaimer: This story is for educational purposes only. We advise investors to consult with certified experts before making any investment decisions.
