How to invest in government bonds in India

Kavya Balaji   /   January 21, 2021

A Government Security (G-Sec) is a tradable instrument issued by the Central Government or the State Governments.

So, what are the different types of government bonds?

In India, the government issues short term as well as long term government securities (G-Sec). Short-term G-Sec are those that have a maturity of less than one year. These are often treasury bills, or T-bills. Treasury bills are zero coupon securities and pay no interest. Treasury bills come with a maturity of 91 days, 182 days and 365 days.

G-Sec with a maturity of one year or more are long-term government bonds. While the Central government issues treasury bills and government bonds, State governments issue only bonds called the State Development Loans (SDLs).

How are government bonds issued in India

The government sells bonds using auctions where it announces auction dates and the details of the bonds that will be sold. The government will disclose the value of securities it intends to sell. Two auction processes are employed: There are yield-based auctions and price-based auctions. The former is used to sell new G-sec bonds while the latter is where the government will reissue securities issued earlier.

The Reserve Bank of India (RBI) conducts auction of G-sec and T- bills on a weekly basis as per the schedule below. 

Government SecurityBidding Period Starts on NSE e-GsecBidding Period Ends on NSE e-GsecAuction Date at RBI Settlement Date
T-Bills (91 day,182 day, 364 day) Monday Tuesday Wednesday Thursday
GoI Dated SecuritiesTuesday Thursday Friday Monday

*Source: HDFC Securities

The stock exchanges offer a non-competitive bidding window to retail investors every week for all G-Secs. You can bid using your trading account and the funds will be deducted from your linked bank account. The G-Secs will be credited to your demat after they are successfully allotted. The interest payments will be credited to your bank account. Since government bonds are listed on stock exchanges, you can sell them anytime. 

Which are the government bonds you can consider?

Usually, bank fixed deposit interest rates are more for the short term when compared to those offered by short term government securities. However, most of the time long term government bonds offer better interest rates than bank deposits. One such bond is the Floating Rate Savings Bond, 2020 (Taxable). These bonds were launched on July 01, 2020. The government is using these bonds to enable Resident Indians to invest in a taxable bond, without any monetary ceiling. The tenure for the bonds is 7 years. You can hold these bonds jointly. 

Since the bonds will have a floating interest rate, they are floating rate bonds. The interest rate of the bond will be based on the interest rate of the National Savings Certificate (NSC). The interest rate for the floating rate bonds will be NSC interest rate plus 35 basis points over the rate. The interest rate for the floating rate bonds will be reset on a half-yearly basis. The interest on the floating rate bonds will be payable at half yearly intervals. One payment will be made on January 1st and the other will be on July 1st every year. The present interest rate for these bonds is 7.75%. The interest received from the bonds will be taxable under the Income-tax Act, 1961. 

The floating rate bonds will be issued only in the electronic form. You will need to hold the bonds in an account called Bond Ledger Account (BLA), opened with the Receiving Office.

Other government bonds such as the Sovereign Gold Bond (SGB) (read this article to learn how to invest in SGB), Capital Gains Bonds and Tax-Free Bonds can also be considered.

How are government bonds taxed?

There will be no tax deducted at source (TDS) for government bonds. However, the interest for the bonds is taxable. Capital gains on sale of bonds will be taxed as per the investor’s income tax bracket if they are short term. Long term capital gains will be taxed at 20% with indexation benefit. 

Looking to invest in government bonds? The team at can help you. Click here to invest. 

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