Bonds & G-Secs – Secured Fixed Income
Bonds provide fixed returns with lower risk. G-Secs are government-backed and considered safest.
Snapshot
Overview
Types
Metrics
Taxation
Glossary
Snapshot
| Aspect | Description |
|---|---|
| Instrument | Tradeable Debt Security |
| Returns | Fixed coupon + price appreciation (if sold before maturity) |
| Maturity | Predefined (91 days to 40 years) |
| Risk Profile | Low to moderate (varies with issuer rating) |
| Liquidity | Moderate (better for listed & G-Secs) |
| Regulator | SEBI (corporate), RBI (G-Secs) |
| Taxation | Taxed at investor's slab rate |
Overview
What is a Bond?
A bond is a fixed-income instrument representing a loan made by an investor to a borrower (typically a government, PSU, or corporate entity). In return, the issuer promises to pay periodic interest (called coupon) and repay the principal (called face/par value) at maturity.
Bonds are designed to provide stable, predictable returns and are ideal for conservative investors seeking capital preservation with income.
How Bonds Work?
- Issuance: Government or company issues bonds to raise capital.
- Purchase: Investors buy bonds at face value (₹100 typically).
- Coupon Payment: Interest is paid semi-annually or annually.
- Maturity: Issuer repays face value to bondholders.
Bonds may trade in the secondary market at premium or discount depending on interest rates and credit risk.
Market Structure & Regulatory Oversight
- SEBI (Securities and Exchange Board of India): Regulates corporate bond market, listing & disclosure norms, supervises intermediaries like CRAs (Credit Rating Agencies), Debenture Trustees, RTAs (Registrar & Transfer Agents). Ensures investor protection through regulatory frameworks.
- RBI (Reserve Bank of India): Regulates and auctions government securities. Conducts Open Market Operations (OMOs), Runs NDS-OM for institutions and Retail Direct Portal for individuals.
- Stock Exchanges (NSE/BSE): Enable trading and listing of bonds through RFQ (Request for Quote) and Order Book based systems. Enable corporate bond and G-Sec visibility for both retail and institutions.
Key Intermediaries in the Bond Market
- Issuer: The entity raising capital via bonds (e.g., GoI, State Govts, Corporates, PSUs, NBFCs). It sets bond terms (coupon, maturity), complies with SEBI/RBI norms. For government securities, RBI issues on behalf of Government of India (GoI)
- Debenture Trustees: Protect interests of bondholders in corporate debt issues. Monitor compliance with covenants and ensure payment timelines Mandatory under SEBI for listed debt issues.
- Primary Dealers (PDs): Underwrite G-Sec issuances in RBI auctions. Provide liquidity by market-making.
- CRAs (Credit Rating Agencies): Rate bonds based on issuer risk and assessing creditworthiness. Assign ratings (AAA, AA+, etc.) which help investors evaluate risk.
- Clearing Corporation (e.g., ICCL, NSCCL, CCIL):Responsible for clearing and settlement of bond trades. Ensures counterparty guarantee and trade finality. CCIL (Clearing Corporation of India Ltd) clears government securities on NDS-OM.
- Depositories (NSDL, CDSL): Hold bonds in electronic (Demat) form. Facilitate settlement, safekeeping, and transfer of securities.
- Registrar & Transfer Agent (RTA): Maintain investor records for bond issuance and servicing Facilitate redemption, interest payment, KYC updates, etc.
- Brokers / Trading Members: Facilitate bond transactions on NSE/BSE for investors. May also offer access to debt IPOs and non-listed private placements.
- RBI Retail Direct Portal: Online platform for individual investors to buy/sell G-Secs, SDLs, T-Bills directly from RBI. Provides seamless bidding in auctions and holding of bonds in Gilt account (RDG account).
Types
The bond and government securities (G-Sec) market in India offers a variety of fixed-income instruments differentiated by issuer, tenor, security level, and tax treatment. Each serves a specific purpose—be it sovereign borrowing, corporate capital raising, or infrastructure development.
Issuer Type Based Classification
This is the most widely followed classification on Indian exchanges.
| Type | Description |
|---|---|
| Government Securities (G-Secs) | Issued by the Government of India through RBI; carry sovereign guarantee; used for long-term borrowing |
| State Development Loans (SDLs) | Issued by State Governments; considered almost as safe as G-Secs |
| Treasury Bills (T-Bills) | Short-term zero-coupon securities (91, 182, 364 days); issued at a discount to face value |
| Corporate Bonds | Issued by corporates, PSUs, NBFCs to raise capital; carry credit risk based on issuer rating PSU Bonds |
| Municipal Bonds | Issued by urban local bodies to fund infrastructure or smart city projects |
Maturity / Duration Based Classification
| Type | Description |
|---|---|
| Money Market Instruments | <1 year (e.g., T-Bills, Commercial Papers) |
| Short-Term Bonds | 1–3 years |
| Medium-Term Bonds | 3–7 years |
| Long-Term Bonds | 7–40 years (common for G-Secs) |
| Perpetual Bonds | No fixed maturity; callable after a certain period by issuer |
Security & Risk Profile Based Classification
| Type | Description |
|---|---|
| Secured Bonds | Low risk level. Backed by collateral/assets (e.g., company property). |
| Unsecured Bonds | Medium–High risk level. Backed only by issuer's creditworthiness. |
| Sovereign Bonds (G-Secs) | Very Low risk level. Guaranteed by Government of India. |
| Credit-Enhanced Bonds | Low–Moderate risk level. Enhanced through guarantees or partial credit enhancements (often for infra/NBFC projects). |
Interest Payout Structure Based Classification
| Type | Description |
|---|---|
| Fixed Rate Bonds | Pay fixed coupon till maturity (most common) |
| Floating Rate Bonds (FRBs) | Coupon is reset periodically (linked to repo rate or T-Bill yields) |
| Zero-Coupon Bonds (ZCBs) | No periodic interest; issued at discount and redeemed at face value |
| Step-Up Bonds | Coupon increases at set intervals |
| Step-Down Bonds | Coupon decreases over time |
Tax Treatment Based Classification
| Type | Description |
|---|---|
| Tax-Free Bonds | Interest exempt (generally issued by PSUs like NHAI, PFC) |
| Taxable Bonds | Regular coupon taxable as per slab |
| Capital Indexed Bonds | Principal indexed to inflation; rare and RBI-issued |
| SGBs (Sovereign Gold Bonds) | Though not debt, classified under RBI bonds. Capital gain exempt after 8 years if held to maturity |
Special Cases
| Type | Description |
|---|---|
| Green Bonds | Fund eco-friendly projects; issued by corporates or municipalities |
| Masala Bonds | INR-denominated bonds issued offshore by Indian companies |
| Electoral Bonds | Bearer bonds for political donations; issued by SBI, not market traded |
Metrics
Bond evaluation requires analyzing a mix of yield-based, credit-based, and duration-related metrics. These indicators help investors assess returns, risk, interest rate sensitivity, and issuer credibility.
Fundamental Metrics
| Metric | What It Indicates |
|---|---|
| Coupon Rate | The fixed or floating interest rate paid by the bond issuer on the bond’s face value. Determines fixed periodic cash flows. Actual returns depend on purchase price and holding duration. |
| Current Yield | Measures return relative to current market price. |
| Yield to Maturity (YTM) | The total return expected if the bond is held until maturity considering coupon, purchase price, time to maturity, and redemption value. This is the core return metric for comparing bonds. |
| Yield to Call (YTC) | Return assuming the bond is called (redeemed) before maturity. It is used for perpetual and callable bonds. |
| Macaulay Duration | Weighted average time to receive bond cash flows. It measures interest rate sensitivity — higher duration means more price movement if rates change. |
| Modified Duration | Measures bond price sensitivity to a 1% change in interest rate. It is crucial for risk-adjusted bond portfolio planning. |
| Convexity | Second-order measure showing how bond duration changes with yield changes. It is used in advanced institutional strategies to understand price behavior in volatile markets. |
| Credit Rating | Independent assessment of issuer’s creditworthiness. Ratings are dynamic and must be monitored; downgrade risk can affect price and liquidity. |
| Accrued Interest | Interest earned between the last and the next coupon date. Added to price when buying in the secondary market. Important for valuation and taxation on sale. |
Taxation
Tax treatment for bonds and government securities in India depends on the type of bond, holding period, and income nature (interest vs capital gain). Unlike equity, most bonds are taxed as non-equity instruments, subject to slab rates unless specifically exempted.
Interest Income Taxation
- Tax Nature: Interest earned (coupon payments) on most bonds is classified as ‘Income from Other Sources’.
- Tax Rate: Taxed at the investor’s applicable income slab rate.
- TDS: Listed Bonds usually has no TDS for resident individuals. For Unlisted/NCDs/Taxable Bonds, TDS @ 10% may apply. Interest from Tax-Free Bonds (like NHAI, PFC, REC) is exempt if held in demat and not transferred.
Capital Gain Taxation
| Type | Short-Term Holding Period | STCG Tax (Short-Term) | LTCG Tax (Long-Term) |
|---|---|---|---|
| Listed Bonds & G-Secs | ≤12 months | Taxed at investor’s slab rate | 12.50% |
| Unlisted Bonds / NCDs | Any duration | Taxed at investor’s slab rate | Taxed at investor's slab rate (if purchased on or after 1/Apr/2023) |
Special Cases
- G-Secs via RBI Retail Direct: No TDS
- Tax-Free Bonds: Interest fully exempt
- Sovereign Gold Bonds (SGBs): Capital gain exempt if held till maturity (8 years)
Tax Filing Requirements
- Schedule CG (Capital Gain) in ITR should capture capital gains from Bonds or G-Secs.
- Schedule OS (Other Sources) in ITR should capture interest income from Bonds or G-Secs.
- Tax-Free interest should be reported under Exempt Income Schedule
- Use AIS for validating reported sale proceeds, and dividend income.
Glossary
- Accrued Interest: Interest earned by a bondholder since the last coupon payment. This is added to the bond’s clean price to calculate the total settlement price (i.e., dirty price).
- Auction (G-Sec): A mechanism by which the RBI issues G-Secs via competitive or non-competitive bidding on the NDS-OM or RBI Retail Direct.
- Bond: A fixed-income instrument representing a loan made by an investor to a borrower (government or corporate), with a promise of regular interest and repayment at maturity.
- Clean Price: The price of a bond excluding any accrued interest. It reflects only the present value of future cash flows and is typically quoted in bond markets.
- Credit Rating: An independent evaluation of a bond issuer’s creditworthiness provided by CRISIL, ICRA, CARE, etc.
- Coupon Rate: The fixed (or floating) rate of interest paid annually or semi-annually on a bond’s face value.
- Current Yield: The ratio of the bond's annual coupon income to its market price.
- Dirty Price: The total price paid by the buyer of a bond, including accrued interest.
- Gilt Fund: A mutual fund that invests primarily in G-Secs and State Development Loans (SDLs).
- G-Sec (Government Security): A debt instrument issued by RBI on behalf of the central government, offering risk-free returns.
- ISIN (International Securities Identification Number): A 12-character alphanumeric code that uniquely identifies each bond.
- Issue Price: The initial price at which a bond is offered to investors. It may be at par, premium, or discount.
- Interest Payment Date: The scheduled date(s) on which the bondholder receives interest (coupon) from the issuer.
- Macaulay Duration: A weighted average time to receive all bond cash flows. A measure of interest rate risk.
- Maturity Date: The date on which the bond principal (face value) is repaid by the issuer.
- Perpetual Bond: A bond with no maturity date, often callable by the issuer after a certain period.
- Primary Dealer (PD): RBI-authorized entities that participate in primary G-Sec auctions and provide market liquidity.
- RBI Retail Direct: An RBI platform allowing retail investors to purchase and manage G-Secs directly.
- SDL (State Development Loan): A debt instrument issued by state governments, carrying slightly higher yields than G-Secs.
- Secondary Market: Where existing bonds are traded after issuance — e.g., NSE, BSE debt segment, or NDS-OM.
- Sovereign Guarantee: A full repayment assurance backed by the Government of India — applies to G-Secs.
- T-Bill (Treasury Bill): A short-term, zero-coupon government security issued at a discount and redeemed at par.
- Yield to Maturity (YTM): The total return expected if the bond is held to maturity, considering both coupon payments and capital gains/losses.
