The government securities market in India is flourishing since RBI made investment easy for retail investors. Government bonds are largely responsible for the popularity and rapid growth of the market. They have become one of the safest investment instruments due to the sovereign guarantee backing them. The transactions happen directly between the government and the investors, providing practically zero risk of default.
Specific procedures and guidelines are followed for the announcement and issuance of government bonds. Auctions are conducted in accordance with proper regulations. While investors must have an adequate understanding of government bonds, how they are issued, and their many types, the actual process to invest in government bonds India is easy to follow and can be done online without any hassle.
Read on for a thorough guide on government bond investments, along with information on all the important factors to know while investing!
What is a Government Bond?
When a government, central or state, in India, faces a capital shortage and requires funding for development or infrastructure projects or to bridge any gap in the budget, it will need to borrow money. Issuing securities like bonds to the public is a convenient way to collect the required funds. It is essentially the government borrowing (a loan) from the public and paying interest periodically (every six months) for a pre-decided tenure. On the day of maturity, the investors holding the bond get the primary investment (face value of the bond) back.
Who Should Invest in Government Bonds?
Investors eligible to buy government bonds are financial institutions, institutional investors, and retail investors. Government bonds are best suited for investors with:
- Low-risk appetite
- Need for stable rates and regular interest payout
- Long-term investment goals
Investors with high-risk tolerance can often look for a low-risk tool to balance their portfolio. In such circumstances, government bonds can be greatly useful.
How Do You Keep Track of Government Bonds Issuance?
RBI issues government bonds through auctions after consulting the government and in alignment with the funding requirement. Once the requirement is evaluated, RBI publishes a half-yearly auction calendar. It contains all the information about the securities investors may require. RBI announces the same via notifications on its website, press releases, and newspaper advertisements around a week prior to the auction.
Generally, auctions are held on Fridays, and settlements are done on a T + 1 basis (the next Monday).
How to Pick the Ideal Government Bond?
The best approach here is to understand the various types of government bonds in India for investment and scope out the one that best suits the respective portfolio. Here are some examples:
| Investor Profile | Suitable Government Bond |
|---|---|
| Investors with low to no risk tolerance and requiring income at a stable rate | Fixed Rate Bonds |
| Investors looking forward to reaping high returns during the market rates uprising & willing to take the hit during low rates | Floating Rate Bonds |
| Investors looking for long-term investments without any need for periodic interest payouts | Zero-Coupon Bonds |
| Investors looking for a hedge against inflation | Capital-Indexed Bonds & Inflation-Indexed Bonds |
| Investors looking for great liquidity | Bonds with Put Options |
| Investors willing to invest at the rate of gold | Sovereign Gold Bond |
| Investors trying to save on taxes | Tax-Free Bonds |
Factors to Remember When Investing in Government Bonds Online
Here are some more factors to consider when choosing from govt bonds to invest. These will influence your investment decisions and outcomes.
Bidding Limit
Each PAN or UCC is eligible for a single bid and no more. If participating in auctions, proper evaluation and planning are recommended.
Bidding Amount Limit
The minimum bidding amount is INR 10,000, which makes investment in government bonds more feasible for investors of all sizes. The maximum cap is INR 2,00,00,000 per security and auction.
Maturity Period
RBI has termed government securities with a tenure of more than 1 year as bonds or dated securities. It can go up to as long as 40 years.
Taxation
TDS does not apply to government bonds. That said, the interest accumulated and credited to the bond holder’s account is considered income from other sources; it is added to the gross total income and taxed as per individual tax slab. Capital gains are also subjected to tax. Tax is imposed on long-term capital gains at a 10% rate and on short-term gains at applicable tax slab rates.
Liquidity & Tradability
Bonds can have a pull option that allows the investors to sell them back to the primary issuer. Besides, bonds are tradable in the secondary market as well. NSD-OM and the stock exchange are active secondary markets.
How to Invest in Government Bonds: Step-by-Step Guide from GoldenPi
The journey of government bond investment in India will become more convenient when you have access to a comprehensive, reliable platform. Instead of roaming around the internet to find the latest issuance of government bonds and associated information, finding a platform with all important details will be more agreeable. The best scenario will be the same platform enabling and guiding you to choose and invest in the most fitting investment tools. Here’s where GoldenPi comes into the discussion. This fintech company is committed to bringing bonds to individual investors and helping draft the best investment portfolios!
GoldenPi has an easy and quick 3-step government bond investment process.
Step 1: KYC
You can complete your KYC online on GoldenPi, where digital documentation is available. It does not require much time or effort. Here’s how you can proceed:
- Visit GoldenPi.
- Click on the Login/ Sign Up button located in the top right corner of the screen.
- Complete the sign-up using your mobile number or email address. If you are already registered on the platform, log in using your credentials.
- After the sign-up, upload soft copies of the KYC documents:
- Photo
- Pan Card
- Address proof (Aadhaar/ Voter ID/ Driving License/ Passport)
- Latest bank statement or a canceled cheque. Your name should be printed on the canceled cheque. You can, otherwise, upload bank statements of the last 2 months where your name, account number, and IFSC code are mentioned.
- Latest Demat CMR copy, eCAS statement of CDSL/NSDL, or latest holding statement with DP ID and Client ID. You can get it from your brokers.
Once you have uploaded all the documents, it will take us 1 working day at maximum to complete the verification. In case of any issue, our team will contact you and help resolve it.
Step 2: Government Bond Selection
You are already aware of the many types and features of government bonds. You can see the latest issuance on GoldenPi’s government securities section. Take your time to check out the details, and choose options that align with your investment goals.
Step 3: Payment & Bond Issuance
The final step to completing your government bond investment is to complete the payment, which can be done online on GoldenPi. Once the payment is successful, the bond units will get transferred to your Demat account on T (transaction day) + 1 day.
FAQs About How To Invest In Government Bonds Online
1. Are government bonds completely secure?
When an investor buys a government bond, the government provides a guarantee of returns. The sovereign backing eliminates the chances of any default.
2. Can I directly invest in government bonds?
The Retail Direct Scheme of RBI permits retail investors to invest in government bonds directly. To do so, one must open an RBI Direct Gilt account.
3. How and where are state development loans issued?
State development loans fall under the government debt securities and are issued by RBI. These securities are also sold via auctions. RBI issues notifications, press releases, and newspaper advertisements prior to the auction. The auctions for SDLs are generally conducted on Tuesdays and are settled on a T + 1 basis, that is, Wednesdays.
4. How do zero coupon bonds work?
Zero coupon bonds are generally issued at a discounted rate. So, an investor buys them at a lower value than its face value. A zero coupon means the government does not pay any interest. However, on maturity, the original bond value is generated.
5. Is it a smart move to sell a bond before maturity?
There might be many reasons for an investor wanting to sell a bond before maturity, like capital requirement, higher interest rates, and returns offered by sudden changes in the market. Take all influencing factors into consideration when deciding. One con for selling a bond before maturity is the imposition of capital gain tax. Calculate and compare if the loss in tax can be adjusted by the profit of the sale.
6. Who takes care of the clearing and settlement of government securities?
Clearing Corporation of India Ltd (CCIL) is responsible for clearing and settlement of all transactions in the Government securities, foreign exchange and money markets in the country. It stands as a central counterparty in various RBI-regulated financial markets’ segments.
7. What happens when the date of a government bond interest payment falls on a holiday?
If the interest payout date of a government bond falls on a holiday, it is paid on the next working day. In case the maturity date is a holiday, the payment is made on the previous working day.
