Government Bonds! You must have heard about this investment option. It is a highly rewarding investment. Issued by the Central & State governments in India. Moreover, government bonds in India are a crisis option that helps the governments to generate the needed liquidity. We simplify this important instrument for the benefit of our readers in this analysis. Let's begin!
In This Article
- What are Government Bonds?
- Types of Government Bonds in India
- i)Fixed-Rate Bonds
- ii)Sovereign Gold Bonds
- iii)7.75% GOI Savings
- iv)Floating Rate Bonds
- v)Inflation-Indexed Bonds
- vi)Bonds with Call/Put Option
- vii)Zero-Coupon Bonds
- Advantages of Investing in Government Bonds
- Disadvantages of Investing in Government Bonds
- Tax treatment of Government Bonds
- Who Should Invest in Government Bonds?
What are Government Bonds?
A government bond is a debt- investment for investors whereas for central and state government it's an instrument of collecting funds. Which is used for different purposes such as developing infrastructure executing the policies etc.
Under this bond investors loan money to the government in return for a fixed rate of interest. For instance, an investor lends 10,000 to govt for 10 years with a fixed interest of 5%. So govt will provide him 5% interest or coupons at regular intervals until the maturity date.
In India, these bonds fall under G-sec or Government Security and are available for 5-40 years.
Earlier these government bonds in India were only available to big investors such as huge companies and banks but now are accessible to small investors and individuals too.
Now let's move further and know about the types of Government Bonds in India!
Types of Government Bonds in India
They are summed up as below,
1. Fixed-Rate Bonds
2. Sovereign Gold Bonds
3. 7.75% GOI Savings
4. Floating Rate Bonds
5. Inflation-Indexed Bonds
6. Bonds with Call/Put Option
7. Zero-Coupon Bonds
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These are the type of bonds that have fixed interest rates even if the market rates keep on fluctuating during the tenure period.
In other words, it remains the same, no matter what ups and downs are sought in the market.
Sovereign Gold Bonds
Under this bond, entities are allowed to invest in golds (no physical) for some time.SGB's rates are similar to gold prices and the earned amount of interest in this type of bond is excluded from the tax.
7.75% GOI Savings
As the name suggests it holds a fixed interest rate that is 7.75. Introduced in 2018 to replace an 8% savings bond.
These bonds can be issued in 1000 or it's multiple to those who are not NRI's or are part of Hindu undivided families. However, minors with legal representatives are also allowed to hold this bond.
Floating Rate Bonds
The rate of interest return keeps on changing under this bond. These changes take place at an interval of 6 months. Announced beforehand of the maturity date.
It's a kind of safety instrument for retail investors. Subsequently indexed as consumer price index or wholesale price index. It safeguards the investors against any macroeconomic risks in the country by allowing the constant return to the entity irrespective of the inflation in the economy.
Bonds with Call/Put Option
These bonds come with rights such as call option, put option, or both. Where either the issuer can buy back (call) or the investor can sell it to the issuer (put).
Govt or investors can exercise their rights only after the lapse of 5 years from the date of allotment.
These bonds do not get any interest but benefit the investor with the difference of issuance price and redemption value. Existing securities comprise these bonds.
After discussing the types of government bonds in India, it's time to talk about the advantages and disadvantages of investing in those bonds.
Advantages of Investing in Government Bonds
Following are the advantages of investing in such bonds,
When it comes to safe investment govt bonds are best. As they promise assured interest returns and stability of funds to the investors.
2. Guaranteed Return
Government bonds allow a guarantee on the principal amount as well as the fixed interest rate. These bonds are available for a longer period.
3. Regular Income
The earned interest is provided to the investors every six months. It means it is a good source of regular income for those who wish to earn with their idle funds.
Disadvantages of Investing in Government Bonds
Following are the disadvantages of investing in such bonds,
1. Lesser Returns
Government t bonds allow a lower rate of interest than any other investments such as real estate, equity, and so on.
2. Losses value
Government Bonds demand long-term investment and by the time the investor receives the interest, it loses its relevancy.
Tax treatment of Government Bonds
The interest earned from investments determines the tax applicable to the earnings
in the case of regular taxable government bonds. On the other hand, interest earned from tax-free bonds such as SovereignGold Bond is exempt from taxes.
Whereas bonds such as 7.75% GOI Savings are taxable as per the Income Tax Act 1961. Under which the interest earned from these bonds is taxed at a marginal slab rate of 30%.
Moreover, if the listed bonds are held for more than 12 months and unlisted bonds are held for more than 36 months the capital gain tax will be 10%.
Who Should Invest in Government Bonds?
Government Bonds are kind of safest interest-earning instrument for investors. It provides a Sovereign guarantee and superlative security to the funds. By keeping them safe from all forms of uncertainty and crisis in the market. Those who don't possess any experience in the field of the stock market can step into the marketing industry by making long investments.
The government is also suitable for those who wish to earn regular interest without putting their money at risk and diversify their portfolio as well.
In the nutshell, government bonds are fundraising instruments. That allows investors to earn through interests. There are various types of government bonds one can choose from. Based on their income and need.Just like any other investment tool it has certain pros and cons. So always choose wisely to enjoy longer benefits without worries.
Furthermore, the government is taking several measures to ensure that government securities gain understanding and popularity among retail investors. Moreover, they have also introduced simplified methods of subscription for retail investors.
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