The RBI first issued 8% bonds in 2003.
As the name suggests, they pay 8% interest per annum and the interest income is taxable. Investors need to invest a minimum of Rs. 1,000 there is no ceiling or limit on the investment amount. Normally, the bonds have a maturity of six years. For senior citizens, the tenor may be lower. Interest is either paid semi-annually or cumulatively at the time of maturity. These bonds are transferable but are not traded on the secondary market. Essentially, the bonds accrue interest and there is no capital appreciation. Since they are issued by the government of India, the credit quality is highest.
Investment Strategy Investors with no tax liability (Charitable Institutions, etc.) will benefit the most from these bonds.
It also makes sense for investors who are in/below the 20% tax slab.
For investors in the highest tax bracket, the 8% interest translates into a 5.6% return post taxes. It’s important to keep in mind that the returns earned are risk-free. In comparison, the 5-year post office term deposit rate is currently at 7.6% (5.32% post taxes). A medium-term debt mutual fund may deliver higher returns from both capital appreciation and indexation benefits.