Government Bonds: Types, Benefits & How to invest

What are Government Bonds?

Government bonds are issued by the national government and are debt obligation issued to raise funds for government spending. It is also preferred for its fixed income benefit.

The many advantages that the different type of Government Bonds provide attracts individual investors from various section of our society. Government Bonds are a long-term investment ranging from 4 to 40 years. It falls under government securities (G-Secs) category.

Who issues these Bonds?

The Indian government bonds are a fixed income instrument issued by the Central and State Governments of India. These bonds are issued to raise funds for infrastructure, liquidity crisis, public projects, etc.

Types of Government Bonds India

Government bonds in India can be a good investment option for investors looking to diversify investment portfolio.

There are many types of government bonds in India. The Government Bonds India may vary depending on the issuer, coupon rates, and tenure. Depending on the bond issued, bonds come with varying interest rates and risks. You can choose to make your investment considering the essential factors.

If you are not familiar with Government bonds and looking information on the types of government bonds, check the listed major Government Bonds types below.

Fixed Rate Bonds
The interest rates are fixed for fixed rate bonds. It remains consistent across the investment tenure irrespective of the market rates fluctuations. Fixed Rate Bonds are a good option for the investors looking guaranteed rate of interest for a particular period of time.

Sovereign Gold Bonds (SGB)
These bonds are issued by the Central Government where the investors can invest in gold for a prolonged period, without the burden of investing in physical gold. There is tax exemption provided on the earned interest from SGBs. It is a good investment option for the individuals who prefer investing in low-risk investment options. The expenses incurred in buying or selling Sovereign Gold Bonds (SGB) is low in comparison to the physical gold.

Inflation Indexed Bonds
In the case of Inflation Indexed Bond, the principal and the earned interest are in corresponding to the inflation or deflation. It is also known as inflation-linked bonds. Inflation Indexed Bonds are issued specifically to retail buyers. It is available for trade in the secondary market.

7.75% GOI Savings Bond
As per the RBI directive,7.75% GOI Savings Bond bonds can be held by:
1. An individual or individuals who are not NRI
2. A Hindu Undivided Family
3. A minor who has a legal guardian representative
Interest earnings from GOI savings bonds are taxable according to the Income Tax Act 1961 under the purview of the investor s income tax slab. 7.75% GOI Savings Bonds are issued at a minimum of Rs. 1000 and in multiples of Rs. 1000 thereof.

Bonds with Call or Put Option
In this bond, the issuer exercises the right to buy-back such bonds (known as a call option) or exercise the right to sell (known as a put option) to the issuer. The issuer or the investor buying Bonds with Call or Put Option can exercise the rights to buy-back or sell these bonds only after five years from the issue date.

Zero Coupon Bonds
As the name suggests, Zero Coupon Bonds earns zero interest i.e., no interest. The income generated from Zero-coupon bonds accrues from the difference in the issuance price at a discount and redemption value at par. These bonds are created from existing securities rather than issuing them through auction.

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Fixed Rate Bonds
The interest rates are fixed for fixed rate bonds. It remains consistent across the investment tenure irrespective of the market rates fluctuations. Fixed Rate Bonds are a good option for the investors looking guaranteed rate of interest for a particular period of time.

Sovereign Gold Bonds (SGB)
These bonds are issued by the Central Government where the investors can invest in gold for a prolonged period, without the burden of investing in physical gold. There is tax exemption provided on the earned interest from SGBs. It is a good investment option for the individuals who prefer investing in low-risk investment options. The expenses incurred in buying or selling Sovereign Gold Bonds (SGB) is low in comparison to the physical gold.

Inflation Indexed Bonds
In the case of Inflation Indexed Bond, the principal and the earned interest are in corresponding to the inflation or deflation. It is also known as inflation-linked bonds. Inflation Indexed Bonds are issued specifically to retail buyers. It is available for trade in the secondary market.

7.75% GOI Savings Bond
As per the RBI directive, 7.75% GOI Savings Bond bonds can be held by:
1. An individual or individuals who are not NRI
2. A Hindu Undivided Family
3. A minor who has a legal guardian representative
Interest earnings from GOI savings bonds are taxable according to the Income Tax Act 1961 under the purview of the investor s income tax slab. 7.75% GOI Savings Bonds are issued at a minimum of Rs. 1000 and in multiples of Rs. 1000 thereof.

Bonds with Call or Put Option
In this bond, the issuer exercises the right to buy-back such bonds (known as a call option) or exercise the right to sell (known as a put option) to the issuer. The issuer or the investor buying Bonds with Call or Put Option can exercise the rights to buy-back or sell these bonds only after five years from the issue date.

Zero Coupon Bonds
As the name suggests, Zero Coupon Bonds earns zero interest i.e., no interest. The income generated from Zero-coupon bonds accrues from the difference in the issuance price at a discount and redemption value at par. These bonds are created from existing securities rather than issuing them through auction.

Features of Government Bonds

Low Default Risk.
These bonds are be either fixed rate or may carry a floating rate of interest.
Comparatively Low Returns.
Governments bonds can be used as a collateral loan against borrowings on a short-term basis in the repo market. These can be exchanged for cash along with a repurchase agreement of the bond in the future specified date at the end of the contract. You can buy government bonds to earn stable return and enjoy the benefit of capital preservation.
Bidding through RBIs e-Kuber platform for accessing the government securities market (both primary and secondary) through the RBI’s Retail Direct.

How to invest in government bonds in India?

Investing in government bonds in India is simple and easy. If you wish to avail steady, fixed, and better govt bond interest rate, you can use invest via GILT mutual funds or create a trading Demat account with a bank.

Advantages of investing in Government Bonds

Sovereign Guarantee

A sovereign guarantee is the obligation of government to pay back investors in the case of payment defaults by the primary obligor. Investors do not have to worry as the investment made is secure. Sovereign Guarantee is the major advantage for investors buying Government Bonds.

Assured Returns

Investors are at a low risk. It is better in comparison to other assets such as equities. The issuer guarantees a fixed rate of interest for a certain period of time. Government bonds are preferred for the assured returns. The government bonds interest rate is a major attraction for investors.

Regular Source of Income

Government bonds investment can become a regular source of secondary income. The income through the varied govt. bonds is guaranteed and are generally paid half-yearly. The Indian government bonds are a good investment option for secure and good returns.

Who Should Invest in Government Bonds?

First-time buyers or investors looking for fixed income and risk-free investment can make investment in Govt. bonds.

It is the right investment option for investors interested in assured and periodic returns. Government bonds rates are competitive and is a key attraction for the investors.

Also, the investors willing to get rid of one or more risk factors can prefer investing in Govt. bonds.

Investing in Indian Government Bonds

Your decision to invest in Indian government bonds can help you enjoy many advantages. There are many reasons why investors also in the retail segment prefer buying govt bonds more in comparison to other type of bonds.

What is the key attraction associated with govt bonds in India? The irresistible features, returns, security of capital, and minimal risk make govt bonds in India more attractive. Your money parked in bonds is considered safe.

Since government bonds India is backed by government guarantee, it falls in the secure investment option category. For the people who are risk-averse and wish to gain a fixed interest on investment, government bonds India can be a great choice.

You do not need to worry about government bonds interest rate as the coupon rate is comparatively high. You get higher return as compared to fixed deposits and other options available in the country for the general public. Buy govt bonds today!

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Frequently Asked Questions

What is govt. bond?

Backed by government’s credit, govt. bond is a secure instrument for safe investment. It is known to provide assured returns. Govt. bond is thus a good option also for retail investors.

How to invest in government bonds?

You can invest in government bonds offline or using the online platforms or other mediums. You can alternatively use GILT mutual funds or open a trading Demat account with a bank to invest in govt. bonds.

When are the returns paid in Government bonds?

Investors buying Government bonds get the fixed rate of interest paid bi-annually or annually.

What are the popular Government bond types?

The popular Government bond types include Capital Indexed Bonds, Inflation Indexed Bonds, Bonds with Call/Put Options, STRIPS, Sovereign Gold Bonds, Special Securities, Fixed-Rate Bonds, and Floating Rate Bonds.

Does Government bonds have sovereign guarantee?

Yes, sovereign guarantee makes Government bond more safe and preferred choice for investments.

Does Government bonds offer tax benefits?

Yes, investors buying Government bonds get tax benefits.

Who in India issues Government bonds?

Government bonds are issued by the Central government or the Reserve Bank of India.