Government Bonds in India: Types & Interest Rate

India’s government bonds are an essential aspect of the country’s financial system, providing a safe and secure investment option for all resident and NRI investors. These debt securities are issued by the government to fund its spending requirements, including infrastructure development, welfare schemes, and debt refinancing. In this blog, we will delve deeper into the different types of government bonds available in India, their benefits, and how they can be an essential part of an investor’s portfolio.

Government Bonds in India
Government Bonds in India

What are Government Bonds?

A bond is a type of debt instrument wherein investors lend their money to entities at fixed interest rates for specific time periods. Banks, corporates, and governments usually issue bonds. The bonds issued by governments are known as government bonds. In India, both State Governments and the Central Government issue bonds. Government bonds issued by State Governments are known as State Development Loans (SDLs).

List of Government Bonds

Given below are the different types of government bonds in India. Investors including individuals, entities and Non-Resident Indians (NRIs) can purchase such bonds issued by the Indian government.

1. Fixed-Rate Bonds

  • Fixed-rate bonds or coupon bonds are long-term government securities.
  • They offer a fixed rate of interest throughout their tenure, providing investors with a predictable income stream.
  • They are ideal for investors who are looking for a steady source of income.
  • Fixed-rate bonds have maturities ranging from 5 years to 40 years. 

2. Inflation-indexed Bonds

  • In inflation-indexed bonds, the principal, as well as the interest earned on such bonds, is accorded with inflation. 
  • These bonds are indexed as per the Consumer Price Index (CPI) or Wholesale Price Index (WPI) and are mainly suited for retail investors. 
  • These bonds have a fixed tenure and pay a periodic interest rate.
  • Inflation-indexed bonds can be bought and sold on the stock exchange or through authorized dealers.

3. 7.75% GOI Savings Bond

  • They are issued by the Government of India (GOI).
  • These bonds have a maturity period of 7 years.
  • They offer a fixed interest rate of 7.75% per annum payable semi-annually.
  • The interest earned on these bonds is taxable.

4. Zero coupon bonds

  • Zero-Coupon Bonds do not earn any interest.
  • As they do not pay any interest, these bonds are sold at a discount.
  • Earnings from Zero-Coupon Bonds arise from the difference in issuance price (at a discount) and redemption value (at par).
  • These bonds are ideal for long-term investors looking for a fixed return on their investment.

5. State Development Loans 

  • State Development Loans or SDLs are bonds issued by the State Government to meet their budgetary requirements. 
  • SDLs have a fixed interest rate and a specific maturity period.
  • State Development Loans are a low-risk investment option that offers regular income and potential capital appreciation

6. Treasury Bills

  • Treasury bills or T-bills are short-term government bonds with a maturity period of up to one year.
  • They are issued at a discount to their face value and are redeemed at face value upon maturity.
  • T-bills are popular among banks, financial institutions, and individual investors as they are considered safe and liquid.

What are Capital Gains Bonds or 54EC Bonds?

Capital gains bonds, also known as 54EC bonds, are issued by the government to provide a tax-saving opportunity to investors who have earned long-term capital gains  made from property sale. The capital gains bonds have a lock-in period of five years, and the investment made in these bonds is eligible for tax exemption under Section 54EC of the Income Tax Act, 1961

Companies Issuing Capital Gains Bonds

NRIs can buy capital gains bonds issued by the National Highway Authority of India (NHAI) or Rural Electrification Corporation (REC) etc. 

Name of the BondTenureInterest Rate
Indian Railways Finance Corporation (IRFC)5 years5.25% p.a.
Rural Electrification Corporation (REC)5 years5.25% p.a.
Power Finance Corporation (PFC)5 years5.25% p.a.
National Highways Authority of India (NHAI)5 years5.25% p.a.

Why should NRIs Invest in Government Bonds?

Given below are some of the benefits of investing in government bonds:

  • Government bonds are considered one of the safest investment options as they are backed by the government. This makes them a preferred investment option for risk-averse investors.
  • Government bonds offer a fixed rate of interest, which makes them attractive to investors who seek a regular income stream.
  • Government bonds also offer the potential for capital appreciation. If interest rates in the market fall, the value of government bonds increases, leading to capital gains for investors.
  • Government bonds are traded in the secondary market, which means that they can be easily bought and sold. This makes them a liquid investment option.
  • For individuals seeking tax-saving options, certain government bonds offer attractive investment opportunities by providing tax-saving benefits to investors.
  • In contrast to corporate bonds, which carry credit risk, government bonds are secured by the government, thereby eliminating any credit risk. 
  • Government bonds can be used as a diversification tool in an investor’s portfolio. They offer a low-risk investment option and can balance out the riskier investments in an investor’s portfolio.

How to Buy Government Bonds in India?

NRIs can buy government bonds in India on both repatriable and non-repatriable basis. NRI investments in bonds can be made through both NRE (Non-Resident External) and NRO (Non-Resident Ordinary) accounts.

  • Repatriable basis: Online and offline applications can be made by NRI investors from a demat account linked to an NRE account and a rupee-denominated cheque or bank draft linked to the NRE account, respectively.
  • Non-Repatriable basis: Online and offline applications can be made from a demat account and a rupee-denominated cheque or bank draft linked to the NRO account, respectively.

Contact SBNRI

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1- What is Section 54EC of the Income Tax Act?

A- The Income Tax Act of 1961, under Section 54EC, allows for an exemption from capital gains tax when a long-term capital asset, like land or a building, is transferred and the proceeds from the sale are invested in designated bonds within six months of the asset sale.

2- What are the benefits of investing in Government Bonds in India?

A- Here are some of the benefits of investing in Government Bonds:
1- Regular, Safest and consistent returns
2- Portfolio Diversification
3- Tax Benefits
4- regular Income
5- Liquidity
6- Low Volatility 

3- Can NRIs buy Government Bonds in India?

A- Yes, Non-Resident Indians (NRIs) are allowed to invest in government bonds in India. 

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