The Reserve Bank of India's persistent rate-cutting cycle has significantly compressed fixed deposit returns, presenting a challenging landscape for investors who prioritize consistent and assured income streams. Following the latest 25 basis point reduction announced during the December policy meeting, the RBI has lowered the repo rate to 5.25% from 5.50%. This monetary easing has prompted banks to steadily trim their fixed deposit interest rates. Currently, most major banks are offering interest rates in the range of 6.50% to 7.00% on fixed deposits with tenures spanning from one to five years.
Declining Yields and a Potential Alternative
Over the past year, fixed deposit rates across the banking sector have witnessed a notable decline of approximately 1.00% to 1.50%. In this environment of diminishing yields, the Floating Rate Savings Bond, 2020 (Taxable) is emerging as a point of discussion, offering an attractive interest rate of 8.05% per annum. This raises a critical question for investors: can this government-backed instrument serve as a viable and superior alternative to traditional fixed deposits?
Understanding the Floating Rate Savings Bond, 2020 (Taxable)
Commonly abbreviated as FRSB, 2020(T), this bond is issued directly by the Central Government of India. It features a floating interest rate that is intrinsically linked to the prevailing interest rate of the National Savings Certificate (NSC). The bond carries the highest safety credential, being a sovereign issuance. It has a fixed tenure of seven years.
Eligibility and Investment Details: The bond is open to any individual resident in India. The minimum investment amount is set at ₹1,000, with investments accepted in multiples thereof. Notably, there is no upper ceiling on the maximum amount an individual can invest, providing flexibility for high-net-worth investors.
Interest Rate Mechanism and Payment
The interest rate for the FRSB, 2020(T) is calculated as the prevailing NSC rate plus a fixed spread of 35 basis points. For instance, with the current NSC interest rate at 7.70% per annum (for the period January to March 2025), the bond yields 8.05% (7.70% + 0.35%).
This interest rate is reset on a half-yearly basis, specifically on every 1st of January and 1st of July. The reset is based on the NSC rate applicable on those dates. Consequently, the bond's yield is floating; it will increase if the NSC rate rises and decrease if the NSC rate falls. Interest is paid at these same half-yearly intervals directly into the bondholder's registered bank account. There are no options for monthly, quarterly, annual, or cumulative interest payouts.
Taxation and Application Process
The interest earned from the FRSB, 2020(T) is fully taxable. It is added to the investor's total income and taxed according to their applicable income tax slab. Tax Deduction at Source (TDS) is applicable on the interest payments, unless the bondholder has submitted a valid declaration for tax exemption.
Applications for the bond can be submitted either online or in physical form at authorized branches of several prominent banks. This list includes public sector giants like State Bank of India, Punjab National Bank, and Bank of Baroda, as well as private sector leaders such as HDFC Bank, ICICI Bank, and Axis Bank. Payment can be made via cheque, demand draft, cash (up to ₹20,000), or electronic modes. Upon successful subscription, the bonds are issued in electronic format and credited to the investor's Bond Ledger Account (BLA), with a certificate of holding provided as proof.
Liquidity and Repayment Terms
A key consideration is the bond's liquidity profile. The FRSB, 2020(T) is not tradable in the secondary market and cannot be used as collateral for securing loans from banks or financial institutions. Transfer is permitted only to nominees or legal heirs upon the bondholder's demise.
The bonds reach maturity upon completion of the seven-year tenure from the date of issuance. Premature encashment is strictly limited; it is allowed only for individuals aged 60 years and above, and that too subject to specific conditions. The redemption proceeds are directly credited to the bondholder's bank account at maturity.
Investment Analysis: FRSB vs. Fixed Deposits
When placed side-by-side with current bank fixed deposit rates of 6.50% to 7.00%, the FRSB's 8.05% yield appears markedly superior on a pure interest rate comparison. This differential has widened as the RBI has reduced the repo rate by a substantial 125 basis points over the past year, from 6.50% in January 2025 to the current 5.25%.
However, investors must weigh this higher return against several important factors. The FRSB is a floating-rate product. While the NSC rate has remained steady at 7.70% for the last three years (from April 2023 to March 2026), there is no guarantee that the government will not reduce this rate in the future, which would correspondingly lower the FRSB's yield.
Furthermore, the seven-year investment horizon and the lack of liquidity or loan-against-bond facilities mean the capital is effectively locked in. This makes the FRSB, 2020(T) suitable primarily for investors with a long-term outlook who do not require immediate access to these funds and are seeking a sovereign-guaranteed return that currently outpaces traditional fixed deposits.
Disclaimer: This analysis is for educational purposes only. Investors are strongly advised to consult with certified financial experts and consider their individual risk profile and financial goals before making any investment decisions.
