Unlike fixed-rate government securities, FRB 2034 offers a floating coupon that is reset every six months, depending on movements in short-term interest rates.
How much extra interest will investors receive?
The revised coupon will increase the six-month interest payout for investors holding the bond at face value.
For an investment of Rs 1 lakh, the approximate half-yearly interest will rise from Rs 3,225 to Rs 3,630, resulting in an additional Rs 405 before tax.
For larger investments, the increase will be proportionately higher:
- Rs 1 lakh: Additional interest of Rs 405
- Rs 5 lakh: Additional interest of Rs 2,025
- Rs 10 lakh: Additional interest of Rs 4,050
These calculations assume the entire face value is held throughout the interest period. Actual investment returns may vary depending on the purchase price and holding period.
Interest income is taxable according to the investor's applicable income tax slab.
How is the FRB 2034 coupon determined?
The RBI calculates the bond's interest rate using the average Weighted Average Yield (WAY) of the last three auctions of 182-day Treasury Bills, plus a fixed spread of 0.98 percentage points.
The formula has resulted in a 7.26% annual coupon for the current period, compared with 6.45% applicable between April 30 and October 29, 2026.
When Treasury Bill yields increase, the bond's coupon may rise at the next reset. Conversely, declining yields can reduce future interest payouts.
Should investors consider FRB 2034?
FRB 2034 carries sovereign backing, meaning principal and interest payments are obligations of the Government of India. However, investors should evaluate several factors before investing.
Floating returns: The 7.26% coupon applies only until April 29, 2027. Future resets could result in higher or lower interest income.
Taxation: Interest is taxable at applicable slab rates, reducing effective returns, particularly for investors in higher tax brackets.
Liquidity: Investors can buy government securities through RBI Retail Direct and the secondary market. However, market prices fluctuate, and selling before maturity could result in capital gains or losses.
Investment horizon: Investors should compare prevailing market yields with bank fixed deposits and other government securities before making fresh investments.
For existing bondholders, the latest revision provides an immediate income boost. However, investors considering fresh purchases should assess the bond's market price, future interest-rate movements and post-tax yield rather than relying solely on the announced coupon.