Government Bonds

A Government Bond is a debt instrument issued by the Central or a State government for the purpose of mobilizing public money, usually for the purpose of financing infrastructure projects. The authority issuing the Bonds is responsible for redeeming them, or paying the interest and maturity proceeds of the instrument. As the purpose usually is to finance infrastructure development, the maturity periods can be long, usually between 5 and 40 years.

They are also known as government securities (G-Secs) and GILTs. Individual investors can directly invest in these instruments, subject to the stipulations and requirements of each issue.

They are investments that are guaranteed by the issuing government authority and could be considered as one of the safest forms of investment. Hence, they are ideal investments for risk-averse investors.

Types of Bonds

Both the central and state governments can issue bonds of different types:

Fixed-rate bonds

This is the most common type. The rate remains fixed during the period of existence of the bonds. The interest rate is known as the coupon rate.

For investors buying and selling Bonds in the secondary market, the value can change based on market conditions. During inflationary conditions, if interest rates for competing investments rise, the face value of the bonds will decline to a level where the coupon rate, which is fixed, becomes competitive. And vice versa.

Floating Rate Bonds (FRBs)

The rate is not fixed for the entire tenure but keeps changing based on a pre-determined formula as well as the intervals at which the change would be effective.

Sovereign Gold Bonds (SGBs)

These bonds are a method of attracting investments from the public that would normally go into physical gold or gold assets such as jewellery, as has been the tradition in India. These bonds are pegged to the value of gold and also pay a small interest on the investment.

Hence, investors will not only get value on maturity based on the appreciation (or depreciation) in gold prices, which they would be subject to even if they had invested in physical gold. In addition, they will also receive interest, which they would not in case of physical gold. These are also exempt from capital gains tax in the hands of individuals.

Inflation-Indexed Bonds

These are specifically meant for retail investors and seek to deliver a return that compensates them for the rise in prices during the currency of the bond.

Mostly indexed to the Consumer Price Index (CPI), the purpose is to provide a constant return to investors, taking inflation into account.

Treasury Bills (T-Bills)

Bonds issued for under a year are known as T-Bills.

7.75% GOI Savings Bond

Designed as a high-return Bond as compared to several others in existence, this instrument is reserved for investment by resident individuals.

Interest earnings from such bonds are taxable under the Income Tax Act 1961 as per the investors’ applicable income tax slab. The minimum amount at which these bonds are issued is Rs. 1000 and in multiples of Rs. 1000 thereof.

Tax free Bonds

Certain public sector entities get permission to issue tax-free bonds, for raising money for projects of particular importance. These are attractive investments for people with large taxable incomes as it gives them one source that is not taxable.

Zero coupon Bonds

These are issued at a discount, without any attached coupons. The face value is paid to the investor on redemption at maturity. The difference between the buying and selling prices becomes the earning for the investor.