If you already hold G-Secs, T-bills, or debt funds, you know the usual trade-off with a coupon-paying bond: you receive regular interest, but you must reinvest it at whatever rates prevail. G-Sec STRIPS take a different route. They are zero-coupon government securities, created by splitting an existing bond into its individual cash flows. Each piece is bought at a discount and redeemed at face value on a fixed date.
In this guide, we explain how G-Sec STRIPS work, how they are taxed in India, what risks come with them, and how retail investors can access them.
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What Are G-Sec STRIPS?
STRIPS stands for Separate Trading of Registered Interest and Principal of Securities. A regular G-Sec bundles periodic coupons with a principal repayment. STRIPS separate that bundle:
- Coupon STRIPS represent a single interest payment.
- Principal STRIPS represent the principal repayment at maturity.
The facility became operational for Central Government securities in 2010. In June 2025, the RBI extended it to eligible State Government Securities.
How Does Stripping Work?
Not every G-Sec can be stripped, as the RBI sets eligibility criteria. Stripping is done in large lots (minimum ₹1 crore face value), usually by institutions, so retail investors typically buy STRIPS already available in the secondary market.
Take a hypothetical ₹1 crore 10-year G-Sec paying coupons twice a year. Stripped, it becomes 20 coupon STRIPS and one principal STRIP, each tradable separately. Reconstitution reverses the process.
Here is an illustrative example, not a quote. A principal STRIPS with a ₹100 face value and 10 years to maturity, at a 6% yield (semi-annual compounding), would trade at about ₹55.37. Held to maturity, it is redeemed at ₹100, subject to the government meeting its payment obligation. There is no coupon to reinvest along the way.
G-Sec STRIPS vs Regular G-Secs
| Feature | Regular G-Sec | G-Sec STRIPS |
| Interest payments | Periodic coupons | None; zero-coupon |
| How returns arise | Coupons plus price change | Discount to face value, plus price change |
| Coupon reinvestment | Needed to compound returns | Not applicable |
| Rate sensitivity | Moderate to high | Typically higher for the same maturity |
| Tax on accrued value | Coupons taxed when received | May be taxed yearly on accrued value (see below) |
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How Are G-Sec STRIPS Taxed in India?
This is where STRIPS differ most from regular G-Secs. The points below reflect CBDT Circular No. 2/2002 [1], which covers STRIPS, and the Income-tax Act, 2025 (in force since 1 April 2026).
- Yearly accrual: Under the circular, the holder values the STRIPS as on 31 March each year. The increase is taxed as interest income (or business income for traders), even though no cash is received. For example, if a STRIPS bought at ₹55.37 is valued at ₹58.70 on the next 31 March, the ₹3.33 rise per ₹100 face value would be that year’s taxable accretion. This is illustrative.
- Redemption: The taxable amount is the redemption price less the last valuation-date value.
- Sale before maturity: The gain is treated as capital gains (or business income for traders), with income already taxed added to your cost. The circular counts the holding period from purchase or the last 31 March valuation, whichever is later, which indicates short-term gains taxed at slab rates. Some market commentary suggests long-term treatment after 12 months.
- Listing matters: For the 2025 Act, listed securities are long-term after 12 months, and unlisted securities are long-term after 24 months. Make sure the individual STRIPS is traded on a recognized exchange.
- TDS: The circular says no TDS applies to interest on Government securities. Confirm for your holdings.
Small non-corporate investors holding up to ₹1 lakh face value had an option to follow an older method under the circular, so check whether it is available to you.
Risks You Should Understand First
“Sovereign” doesn’t mean “risk-free.” Weigh these:
- Interest rate risk: In our 10-year example, a 1 percentage point rise in yields could cut the market price by roughly 9%. Holding to maturity leaves the redemption value unaffected, but the drop matters if you must sell early.
- Liquidity risk: Trading volumes can be thin, so you may not find a buyer at your preferred price.
- Tax without cash: You may owe tax on accrued value each year without receiving any money.
- Opportunity cost: If rates rise after you buy, you are locked into the older, lower yield.
How to Buy G-Sec STRIPS in India
- RBI Retail Direct: Individuals can buy and sell government securities, including STRIPS available in the secondary market.
- SEBI-registered Online Bond Platform Providers (OBPPs): Some list G-Sec STRIPS. Check the platform’s registration, charges, and available securities.
Before buying, check the maturity date, traded yield, face value you’ll receive, bid-ask spread, and fees.
Final Thoughts
G-Sec STRIPS remove coupon reinvestment and can help match a future goal, such as a fee due in 2036. They suit investors who can hold to maturity and understand the tax and rate risks. They are a poor fit if you need steady income or may exit early. Treat them as one possible building block within your debt allocation, and read the platform’s risk disclosures before investing.
G-SEC STRIPS Frequently Asked Questions
G-Sec STRIPS are zero-coupon securities created by separating the interest payments and principal repayment of an eligible Government of India security into individual tradable securities. Each STRIP pays a single amount on its maturity date.
STRIPS stands for Separate Trading of Registered Interest and Principal Securities. The name describes how the cash flows of an existing government bond are separated and traded individually.
A typical government bond pays interest at intervals and pays its face value when it matures. When the bond is stripped, each interest payment remaining becomes a coupon STRIP, and the principal repayment becomes a principal STRIP. Each has its own maturity date and ISIN.
Yes. Each STRIP represents a single future cash flow and does not pay periodic interest. Investors typically buy it for less than its maturity value and earn a return equal to the difference between the purchase price and the amount received at maturity.
A coupon STRIP is one of a series of scheduled interest payments that comprise the original government bond. A principal STRIP represents the original bond’s principal repayment at maturity.
Yes. This process is called reconstitution. Eligible coupon STRIPS and the principal STRIP can be reassembled into the original government security, subject to RBI’s applicable rules and operational requirements.
Disclaimer
Fixed returns do not constitute guaranteed or assured returns. Investments in corporate debt securities and municipal debt securities/securitized debt instruments are subject to credit risks, market risks, and default risks, including delay and/or default in payment. Read all the offer-related documents carefully. This blog/article should not be construed as financial advice or as an offer or recommendation to buy or sell any security or any products/services of/on GoldenPi or any product/services of its third-party client(s). For a detailed calculation of YTM, visit our website. T&C’s Apply.
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