Various Types of Government Bonds in India (2021)

Types of Government Bonds in India

The numerous variants of Government bonds are examined below –

Fixed-rate bonds

Government bonds of this nature accompany a fixed rate of interest which stays steady throughout the tenure of investment regardless of fluctuating market rates.

Floating Rate Bonds (FRBs)

As the name suggests, FRBs are dependent upon periodic changes in rate of returns. The change in rates is embraced at intervals which are announced beforehand during the issuance of such bonds. For example, a FRB might have a pre-declared interval of a half year; which means interest rates on it would be reset like clockwork throughout the tenure.

There is another form to FRBs, wherein the interest rate is bifurcated into two components: a base rate and a fixed spread. This spread is chosen through auction and stays consistent throughout the maturity tenure.

(Also Read: Municipal Bonds)

Sovereign Gold Bonds (SGBs)

The Central Government issues sovereign Gold Bonds, wherein entities can invest in gold for an all-inclusive period through such bonds, without the weight of investing in physical gold. The interest procured on such bonds is exempted from tax.

Prices of such bonds are connected with gold's prices. The nominal value of SGBs is reached by calculating the simple average of closing prices of 99.99% purity gold, three days preceding such bonds' issuance. SGBs are likewise named in terms of one gram of gold.

According to RBI regulations, there are singular ceilings concerning SGB ownership for various entities. People and Hindu Undivided Families can just hold up to 4 kg of Sovereign Gold Bonds in a financial year.

Trusts and other important entities can hold up to 20 kg if SGBs during a comparative time period. Interest at 2.50% is dispensed periodically on such SGBs and has a fixed maturity period of 8 years except if expressed something else. Likewise, no tax is exacted on interest earnings through such SGBs.

Investors seeking liquidity from such bonds will have to trust that the initial five years will redeem it. Nonetheless, redemption will just produce results on the date of ensuing interest disbursal.

Assuming that Mr An invested in a SGB on first April 2014, and interest disbursals are determined to first May 2014 and like clockwork from consequently. On the off chance that he chooses to withdraw it on first June 2019, he will have to stand by till first November 2019 (interest disbursal date) to get the redemption amount.

Inflation-Indexed Bonds

It is a one of a kind financial instrument, wherein the principal, just as the interest procured on such bond, is accorded with inflation. Principally gave for retail investors, these bonds are indexed according to the Consumer Price Index (CPI) or Wholesale Price Index (WPI).

Such IIBs guarantee genuine returns gathered with such investments stay consistent, accordingly allowing investors to safeguard their portfolio against inflation rates.

Another form of such inflation-adjusted securities is Capital Indexed Bond. In any case, in contrast to IIBs, just the capital or principal proportion of balance is accorded with an inflation index.

(Also Read: Gilt-edged market)

7.75% GOI Savings Bond

This G-Sec was acquainted as a supplanting with the 8% Savings Bond in 2018. As verified from its terminology, the interest rate of such bonds is set at 7.75%. According to RBI regulations, these bonds must be held by –

An individual or people who are/are not NRI(s) in any way

A minor with a legal guardian representative

A Hindu Undivided Family

Interest earnings from such bonds are taxable under the Income Tax Act 1961 according to the investors' applicable income tax slab. The base amount at which these bonds are given is Rs. 1000 and in products of Rs. 1000 thereof.

Bonds with Call or Put Option

The distinguishing highlight of this sort of bonds is the guarantor appreciates the right to buy-back such bonds (call option) or the investor can practice its right to sell (put option) them to such backer. This transaction will just occur out on the town of interest disbursal.

Participating entities, for example the government and investor can just exercise their rights after the slip by of a long time from its issuance date. This kind of bonds might accompany either –

Only Call option

Only Put option

Both

Regardless, the government can buy back its bonds at face value. Additionally, investors can offer such bonds to the guarantor at face value. This guarantees the preservation of the corpus invested in the event of any decline of the stock market.

Zero-Coupon Bonds

As the name suggests, Zero-Coupon Bonds don't acquire any interest. Earnings from Zero-Coupon Bonds emerge from the distinction in issuance price (at a discount) and redemption value (at standard). This sort of bonds are not given through auction but instead made from existing securities.

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