Government Bonds / Government Securities / G-Sec Bonds

Government Bonds or Government Securities or G-Sec Bonds

Government bonds in India, normally known as government securities or G-Secs, are debt securities issued by the Indian central government or state governments. At the point when you purchase Indian government bonds, you are a creditor who is loaning money to the government. Indian government entities offer G-Secs to fund their activities and work out roads, schools and other infrastructure projects.

How Do G-Sec Government Bonds Work?

In India, short-term G-Sec bonds with a maturity of short of what one year are alluded to as treasury bills, or T-bills. Treasury bills are accessible with a maturity time of 91 days, 182 days and 365 days.

G-Sec bonds with a maturity of one year or more are long-term securities, alluded to as government bonds.

The Indian government issues both T-bills and government bonds, while Indian state governments issue just bonds called the State Development Loans (SDLs).

(Also Read: Gilt-edged market)

G-Sec Auctions

The government auctions T-bills and government bonds. It reports auction dates and bond deals early, and uncovers the measure of securities it means to sell. Two auction processes are made: first, yield-based auctions and the second is price-based auctions.

Any investor who purchases a bond can hope to get a return from either:

The coupon interest payments made by the issuer.

Any capital gain (or capital loss) when the bond is sold/developed.

Receipt from reinvestment of the interest payments which are interest-on-interest.

Coupon Yield: This is the coupon installment as a percentage of the face value and alludes to ostensible interest payable.

Current Yield: This is the coupon installment as a percentage of the security's purchase price; all in all, it is the return a holder of the security gets against its purchase price, which might be pretty much than the face value or the standard value.

The price of a bond is the amount of present value of all future cash flows of the bond. The interest rate utilized for discounting the cash flows is the Yield to Maturity (YTM) of the security.

In a yield-based auction, new G-Secs are sold.

In a price-based auction, the government reissues securities issued before.

(Also Read: Gilt Funds)

Participating in G-Secs

Generally, purchasers of G-Secs incorporate banks, primary dealers, financial institutions, mutual funds and insurance companies, who bid either in terms of a coupon for another security or the price for an existing security being reissued.

Until 2001, just institutional investors could bid for government bonds. The market was deregulated around then, opening up auctions to different purchasers. Today, retail investors can partake in government bond auctions by means of noncompetitive bidding up to 5% of the predefined sum the government looks for the G-Sec issuance.

This implies if the advised sum by the government is INR 1,000 crore, the sum reserved for noncompetitive bidders or retail investors would be INR 50 crore and the remaining INR 950 crore will be set up for competitive auctions.

Retail investors incorporate people, companies, corporate bodies, institutions, provident funds, trusts and some other entities permitted by India's central banking regulator the Reserve Bank of India (RBI). Retail investors need to have a current account or a Subsidiary General Ledger (SGL) account with the RBI to take an interest in the auction process.

Any financial backer who has a demat account or is a RBI-affirmed financial backer can likewise take an interest in the noncompetitive bidding.

Returns on G-Secs

The best approach to gauge your return on a G-sec is to assess the yield to maturity.

The Yield To Maturity (YTM) alludes to the compelling pace of interest paid on a security on the off chance that you purchase and hold the security till its maturity date. The yield on government securities is impacted by different factors, for example,

Inflation

Level of money supply in the economy

Future interest rate assumptions

Borrowing program of the government

Monetary policy followed by the government

The figuring for YTM depends on the pace of interest or coupon rate, length of time to maturity and the market price.

The current value of the security is determined by discounting each cash stream at a rate; this rate is the YTM. Consequently, YTM is the markdown rate which likens the current value of things to come cash flows from an attach to its current market price. At the end of the day, it is the inward pace of return on the bond.

The pace of interest or the coupon rate is fixed through a market-based price disclosure process. The price of a security in the business sectors is determined by its demand and supply and is assessed dependent on the proportion of the yield of the G-Sec.

Treasury bills, then again, are zero coupon bonds and are issued by rebate and redeemed at face value.

(Also Read: How to invest in Government Bonds?)

Taxation on G-Secs

Interest income from government bonds is available depending on the holder's income charge section under the Income Tax Act. Gains from the offer of bonds are taxed as either long-term capital gains or short-term capital gains, depending on how long the bonds were held.

Continues from the offer of G-Secs held for a time of a year or less are treated as short-term capital gains, taxed at the holder's marginal income charge rate.

Then again, G-Secs held by the taxpayer for a time of over a year are treated as long-term capital gains. The assessment on these long-term capital gains can be limited by factoring indexation, which is a process by which the cost of acquisition of an asset is changed or recalculated against inflationary ascent in its value.

The inflationary ascent can be assessed by the inflation index distributed by the IT department and depends on the:

Year of acquisition/improvement of the asset

Year of transfer of the asset

Cost inflation index of the time of acquisition/improvement of the asset

Cost inflation index of the time of transfer of the asset

In India, just long-term capital assets have the benefit of indexation. Bondholders have a decision between availing the benefit of indexation or not and are taxed dependent on that.

In the event that the bondholder profits the benefit of indexation, the long-term capital gains will be charged at a typical pace of 20% (in addition to surcharge and cess as material).

At the point when the bondholder doesn't profit the benefit of indexation, the long-term capital gains so processed is charged to charge at 10% (in addition to surcharge and cess as relevant).

(Also Read: How to choose best Gilt Fund in 2021?)