RBI Relief Bonds are bonds issued by the Reserve Bank of India and are widely opted for as a tax saving tool to save additional tax. They are available at all branches of Reserve Bank of India and State Bank of India. Issued by the country's central bank they are one of the safest investment instruments. The risk exposure thus is nil and one can be assured that the invested amount would be redeemed back in full, post maturity. The only drawback of the relief bonds is that there is no tax benefit on the initial investment made for buying the bonds.
The maturity period of the bonds is five years and Reserve Bank of India provides two unique schemes for availing the interest. These schemes are:
- Interest compounded half yearly: If an investor intends to receive interest on the invested amount on a half yearly basis, then he has the option of receiving an interest rate of 8.5%. This interest, compounded half yearly is tax free and can be withdrawn every six months from the date of issue of the bonds.
- Cumulative interest: One may also opt for the cumulative interest scheme in which one receives the total interest together with the invested amount at the end of the five year maturity period. In this scheme one can avail at 10.30% interest and this interest too is tax free.
Thus, in both the options the interest accrued during the tenure of the maturity period is tax free. So if an investor was to invest Rs 1,000 in the RBI Relief Bonds in the year 2005, he would earn a tax free amount of Rs 500 as interest at the end of the five year maturity period thus giving him a total of Rs 1,500 in 2010.
Investment in the RBI Relief Bonds starts at Rs 1000 and thereafter in multiples of thousands. Additionally, as the Reserve Bank of India has not put an upper limit on the amount that can be invested in Relief Bonds, an investor can choose to invest as much money as his budget would allow.
However, the RBI Relief Bonds cannot be redeemed before the maturity period is complete. In the event that one needs to withdraw the money prematurely during the lock in period, then one may sell the bonds in the form of a Promissory Note on the secondary market to a third party for the remaining period of the tenure using a transfer deed.