RBI bonds v/s bank FD: Which gives better returns?
What's the story
Investors often find themselves weighing the options between RBI floating rate bonds and bank fixed deposits. Both investment avenues promise safety and steady returns, but differ in terms of interest rates, liquidity, and risk factors. While RBI bonds offer variable interest rates linked to market indices, bank FDs provide fixed returns for the tenure of the deposit. Here's a look at the key differences between the two.
#1
Interest rate dynamics
RBI floating rate bonds have an interest rate that changes every six months, based on the average yield of government securities. This means that the returns can change with market conditions. On the other hand, bank fixed deposits offer a fixed interest rate for the entire duration of the deposit. This predictability makes FDs more appealing to risk-averse investors who prefer stable returns.
#2
Tenure flexibility
Bank fixed deposits usually come with tenures ranging from seven days to 10 years, giving investors options based on their liquidity needs. RBI floating rate bonds have a longer tenure of seven years with no premature withdrawal option. However, they can be traded in secondary markets, albeit at market prices that may differ from their original value.
#3
Tax implications
Interest earned on bank fixed deposits is taxable as per the investor's income tax slab, although senior citizens get a higher exemption limit on interest income. On the other hand, RBI floating rate bonds are subject to TDS on interest payments above ₹5,000 annually but offer tax benefits under certain conditions if held until maturity.
#4
Liquidity considerations
Liquidity is an important factor when choosing between these investments. While bank FDs allow premature withdrawal (usually at a penalty), they offer more flexibility than RBI floating rate bonds, which can only be sold in secondary markets before maturity. However, selling in secondary markets may lead to losses depending on current market conditions.