Government Bonds

  • What are Government Bonds?

    • Government bond in India is essentially a contract between the issuer and the investor, in which the Government (issuer) guarantees repayment of principal along with interest earning at a maturity date.

  • Who issues these Bonds?

    • A government bond is a fixed income instrument issued by the Central and State Governments of India. These bonds are issued for various reasons like infrastructure, liquidity crisis , public projects etc.

  • Features of Government Bonds

    • Low Default Risk.

    • These bonds are be either fixed rate or may carry a floating rate of interest.

    • Lower 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.

    • Bidding through RBI’s e-Kuber platform for accessing the government securities market (both primary and secondary) through the RBI’s Retail Direct.

Who Should Invest in Government Bonds?

  • Those investors who are very cautious of not taking any risk, also known as risk-averse investors and who consider opting for superlative security for their invested money can invest in Government bonds.
  • It is a suitable mode of investment for those who do not have experience of investing in stock market.
  • Those investors who wish to nullify the risk factor in their investment portfolio can park their investment in Government bonds for getting more than average returns on their investments.

Benefits of Investing in Government Bonds

  • Sovereign Guarantee

    • Government bonds enjoy a privileged status in terms of having stabilised funds and assuring promised returns. As government securities constitute a formal declaration of a debt obligation of the Government, it means the government body has to repay it according to the specified terms.

  • Inflation-adjusted

    • Inflation-indexed bonds balances are adjusted against the increasing level of the average price. Also, the principal invested in capital indexed bonds is adjusted keeping in view of the inflation. This characteristic gives the power to the investors who are financially undermined to invest in such funds for getting the actual value of the deposited funds.

  • Regular source of income

    • According to the RBI directives, interest earnings accrued on Government bonds are expected to be allocated every six months to such debt holders. It gives investors the avenue to earn regular income by parking their idle funds.

Types of Government Bonds in India
    • Fixed Rate Bonds -The interest rates are fixed for fixed rate bonds which remain consistent across the investment tenure irrespective of the market rates fluctuations.

    • Fixed Rate Bonds - The interest rates are fixed for fixed rate bonds which remain consistent across the investment tenure irrespective of the market rates fluctuations.

    • Sovereign Gold Bonds-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. The interest earned from SGBs is exempted from tax.

    • Inflation Indexed Bonds- In this type of bond, the principal and interest earned are in corresponding to the inflation. These bonds are issued to retail investors and are indexed as per the Consumer Price Index (CPI) or Wholesale Price Index (WPI).

  • 7.75% GOI Savings Bond- As per the RBI directive, these bonds can be held by:

    • An individual or individuals who are not NRIs

    • A Hindu Undivided Family

    • A minor with 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. These 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 exercise 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.

    • Zero Coupon Bonds – As the name suggests, it 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.

Bonds India

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