How to Buy Government Bonds in India?

In India, government bonds are one of the safest investment options with relatively low risk while also providing regular returns. Buying government bonds can diversify your holdings and provide you with steady returns. Furthermore, some Indian government bonds have tax advantages, which increases their allure for accumulating money over the long run.

The definition of government bonds, their varieties, how to invest in them, their interest rates, and the top government bonds to buy in India will all be covered in this blog.

What Are Government Bonds?

The Indian government issues bonds to obtain funding for projects such as infrastructure development, public outlays, and improving the economy. There is no risk regarding defaulting on the investment as the government backs the bonds. Once the bonds reach maturity, the investor receives the principal along with periodic interest payments.

Now, if you are wondering what are govt bonds, they are fixed payments from the government to the investor over a specified timeframe in return for a loan provided by the investor to the government.

Types of Government Bonds in India

In India, there are various types of government bonds, some of which also offer tax benefits. Here is a list of bonds in India which investors can opt for:

1. Tax-Free Bonds

• Issued by Public Sector Undertakings (PSUs) such as NHAI, REC, PFC, and IRFC.

• Interest earned is completely tax-free under Section 10(15)(iv)(h) of the Income Tax Act.

• Long tenure of 10-20 years.

• Available only in the secondary market as fresh issuances stopped after 2016.

2. Capital Gains Bonds (54EC Bonds)

• Helps in tax exemption on long-term capital gains from property sales.

• Issued by NHAI, REC, PFC, and IRFC.

• Maximum investment limit: ₹50 lakh per financial year.

• Lock-in period: 5 years.

• Interest rate: ~5.25% per annum (taxable).

• Section 54EC of the Income Tax Act stipulates that these bonds must be bought within six months of the asset sale to take advantage of capital gains tax exemption.

3. Sovereign Gold Bonds (SGBs)

• Issued by the RBI on behalf of the Government of India.

• Returns are linked to gold prices, plus an additional 2.5% annual interest.

• No capital gains tax if held until maturity (8 years).

• Nonetheless, while the taxes on capital gains from the redemption are exempt, the annual interest earnings at the rate of 2.5% are subject to taxation according to the applicable income tax bracket of the individual.

4. RBI Floating Rate Bonds

• The current interest rate of these bonds stands at 8.05%.

• Interest is taxable, and TDS applies for annual interest above ₹40,000 (₹50,000 for senior citizens).

5. Government Securities (G-Secs)

• Issued by the RBI with tenures ranging from 91 days to 40 years.

• No default risk but may have interest rate fluctuations.

• Can be purchased through the RBI Retail Direct platform.

6. Public Sector Unit (PSU) Tax-Free Bonds

• Issued by government-backed PSUs like NHAI, PFC, and REC.

• No fresh issuance after 2016; available only in the secondary market.

• Suitable for high-income investors due to tax-free interest.

How to Invest in Govt Bonds

• RBI Retail Direct : Retail investors can purchase government securities directly through the RBI Retail Direct portal.

• Stock Exchanges : Tax-free bonds and SGBs are available in the secondary market via NSE and BSE.

• Banks and Financial Institutions : Some bonds, such as 54EC bonds, can be bought from PSU banks and designated financial institutions.

• Mutual Funds and ETFs : Certain mutual funds invest in government bonds, offering an alternative way to gain exposure to these instruments.

Government Bonds Interest Rates and Returns

Government bonds offer varying interest rates depending on their type and tenure. The government bonds interest rates in India typically range between 5% to 7%, depending on economic conditions. Below is a general breakdown:

Best Government Bonds to Invest in India

• For tax savings : Tax-Free Bonds, 54EC Bonds.

• For stable returns : RBI Floating Rate Bonds, G-Secs.

• For gold investment benefits : Sovereign Gold Bonds.

• For long-term wealth creation : PSU Tax-Free Bonds.

Who Should Invest in Government Bonds?

• Risk-Averse Investors : If you prefer stable and secure returns.

• Retirees & Senior Citizens : Looking for predictable income.

• Taxpayers : Seeking to reduce tax liability through tax-free bonds and 54EC bonds.

• Long-Term Investors : Planning for financial security and steady growth.

Conclusion

Indian government bonds are an excellent investment for individuals seeking safe returns and tax benefits. Some additional reasons to invest in government bonds are diversification, tax relief, and safeguarding one’s wealth. With the right choice of bonds, you can secure your financial future and achieve regular income effortlessly.