What is Savings Bond and how does it work?

Bond investments have been quite popular amongst risk-averse investors or those looking for a relatively stable income source. However, it has been a misconception that bonds always require substantial initial capital. Savings Bonds have been instrumental in breaking this notion and have managed to garner significant investor attention. Let’s understand the Savings Bond definition, features, and how they work!

What is a Savings Bond?

Savings Bonds were introduced by the Government of India, and they act as a mechanism for them to raise money from the people in the form of debt. The minimum investment amount in Savings Bonds is quite low compared to the usual bond investment requirement. This makes it affordable for most people to invest in bonds and earn relatively good and secure returns. The minimum investment required is Rs. 1000 and can be increased in multiples.

Know the features of Savings Bonds

Having understood the Savings Bond meaning, the following are some of the key features of Savings Bonds:

All individuals and Hindu Undivided Families (HUFs) can invest in Savings Bonds. Therefore, Non-Resident Indians cannot invest in Savings Bonds.
You can apply for Savings Bonds both online and offline. You can even visit your nearest bank, like an Axis Bank branch, for offline applications. You can download the form online or take it from the bank branch, fill it out, and submit it to apply for a Savings Bond.
The Savings Bond are issued in dematerialised form and credited to your Bond Ledger Account. You will receive a holding certificate from the bank as proof of your investment.
The interest on the Savings Bond is paid every 6 months, thus generating a stable source of income for the investors. However, if you seek capital appreciation, you can opt for a cumulative option whereby your interest will be reinvested and accumulated over time, thus giving compounding benefits.
The Savings Bond comes with a lock-in period of 7 years. However, people above the age of 60 years can make premature withdrawals.
You cannot transfer the bonds to another person.
Savings Bonds cannot be used as collateral for loans.
The interest earned on the Savings Bond is taxable.

How do Savings Bonds work?

Savings Bonds are basically debt instruments issued by the government. It acts as a mechanism for the government to borrow money from the people, against which it pays interest to the investors. Investors can either opt for regular interest payment that acts as their passive income or else opt for accumulation of interest. This earns them interest on both the principal and the accumulated interest, thereby unlocking compounding benefits.

How to cash in Savings Bond?

The bond basically comes with a lock-in period of 7 years. Therefore, you can earn an interest payout released every six months. As the bonds are non-transferable, you cannot transfer them to another person to cash in. However, if your age is 60 years or above, you can make premature withdrawals and don’t have to wait for the waiting period to expire.

Also Read: Maximize returns with short-term investments

In a nutshell

Savings Bonds are an attractive investment option, especially for risk-averse investors and those looking for a regular income source. Axis Bank offers an attractive opportunity to invest in the RBI Floating Rate Savings Bonds 2020. You can begin your investment with just Rs. 1000 and invest in multiples. The interest on these bonds is paid on 1st January and 1st July each year. Start your investment journey now!

Disclaimer: This article is for information purpose only. The views expressed in this article are personal and do not necessarily constitute the views of Axis Bank Ltd. and its employees. Axis Bank Ltd. and/or the author shall not be responsible for any direct / indirect loss or liability incurred by the reader for taking any financial decisions based on the contents and information. Please consult your financial advisor before making any financial decision.