Government Bonds India - Types, Advantages and Disadvantages of Government Bonds (2024)

A government bondis a debt instrument issued by the Central and State Governments of India. Issuance of such bonds occur when the issuing body (Central or State governments) faces a liquidity crisis and requires funds for the purpose of infrastructure development.

Government bond in India is essentially a contract between the issuer and the investor, wherein the issuer guarantees interest earnings on the face value of bonds held by investors along with repayment of the principal value on a stipulated date.

Government Bonds India, fall under the broad category of government securities (G-Sec) and are primarily long term investment tools issued for periods ranging from 5 to 40 years. It can be issued by both Central and State governments of India. Government bonds issued by State Governments are also called State Development Loans (SDLs).

Initially, most G-Secs were issued for the purpose of large investors, such as companies and commercial banks. However, eventually, GOI made government securities available to smaller investors such as individual investors, co-operative banks, etc.

There are multiple variants of bonds issued by GOI and State Governments which cater to the various investment objectives of investors. TheGovernment Bond interest rates, also called a coupon, can either be fixed or floating and disbursed on a semi-annual basis. In most cases, GOI issues bonds at a fixed coupon rate in the market.

Types of Government Bonds in India?

The multiple variants ofGovernment bondsare discussed below –

Fixed-rate bonds

Government bonds of this nature come with a fixed rate of interest which remains constant throughout the tenure of investment irrespective of fluctuating market rates.

The coupon on a Government Bond is mentioned in the nomenclature. For instance, 7% GOI 2021 means the following

Rate of interest on face value7%
IssuerGovernment of India
Maturity year2021

Floating Rate Bonds (FRBs)

As the name suggests, FRBs are subject to periodic changes in rate of returns. The change in rates is undertaken at intervals which are declared beforehand during the issuance of such bonds. For instance, an FRB could have a pre-announced interval of 6 months; which means interest rates on it would be re-set every six months throughout the tenure.

There is another variant to FRBs, wherein the rate of interest rate is bifurcated into two components: a base rate and a fixed spread. This spread is decided through auction and remains constant throughout the maturity tenure.

Sovereign Gold Bonds (SGBs)

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

Prices of such bonds are linked 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 also denominated in terms of one gram of gold.

As per RBI regulations, there are individual ceilings concerning SGB possession for different entities. Individuals and Hindu Undivided Families can only hold up to 4 kg of Sovereign Gold Bonds in a financial year. Trusts and other relevant entities can hold up to 20 kg if SGBs during a similar time frame. Interest at 2.50% is disbursed periodically on such SGBs and has a fixed maturity period of 8 years unless stated otherwise. Also, no tax is levied on interest earnings through such SGBs.

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Investors seeking liquidity from such bonds shall need to wait for the first five years to redeem them. However, redemption shall only take effect on the date of subsequent interest disbursal.

Assuming that Mr A invested in an SGB on 1st April 2014, interest disbursals are set on 1st May 2014 and every six months from thereon. In case he decides to withdraw it on 1st June 2019, he shall need to wait till 1st November 2019(interest disbursal date) to receive the redemption amount.

Inflation-Indexed Bonds

It is a unique financial instrument, wherein the principal, as well as the interest earned on such bond, is accorded with inflation. Mainly issued for retail investors, these bonds are indexed as per the Consumer Price Index (CPI) or Wholesale Price Index (WPI). Such IIBs ensure real returns accrued with such investments remain constant, thereby allowing investors to safeguard their portfolio against inflation rates.

Another variant of such inflation-adjusted securities is Capital Indexed Bond. However, unlike IIBs, only the capital or principal proportion of balance is accorded with an inflation index.

7.75% GOI Savings Bond

This G-Sec was introduced as a replacement to the 8% Savings Bond in 2018. As noted from its nomenclature, the interest rate of such bonds is set at 7.75%. As per RBI regulations, these bonds can only be held by –

  • An individual or individuals who are/are not NRI(s) in any capacity
  • A minor with a legal guardian representative
  • A Hindu Undivided Family

Interest earnings from such bonds are taxable under the Income Tax Act 1961 as per the investors’ applicable income tax slab. The minimum amount at which these bonds are issued is Rs. 1000 and in multiples of Rs. 1000 thereof.

Bonds with Call or Put Option

The distinguishing feature of this type of bonds is the issuer enjoys the right to buy-back such bonds (call option) or the investor can exercise its right to sell (put option) them to such issuer. This transaction shall only take place on a date of interest disbursal.

Participating entities, i.e. the government and investor can only exercise their rights after the lapse of 5 years from its issuance date. This type of bonds might come with either –

  • Call option only
  • Put option only
  • Both

In any case, the government can buy back its bonds at face value. Similarly, investors can sell such bonds to the issuer at face value. This ensures the preservation of the corpus invested in case of any downturn of the stock market.

Zero-Coupon Bonds

As the name suggests, Zero-Coupon Bonds do not earn any interest. Earnings from Zero-Coupon Bonds arise from the difference in issuance price (at a discount) and redemption value (at par). This type of bonds are not issued through auction but rather created from existing securities.

Advantages of Investing in Government Bonds?

Sovereign Guarantee

Government Bonds enjoy a premium status with respect to the stability of funds and promise of assured returns. As G-Secs are a form of a formal declaration of Government’s debt obligation, it implies the issuing governmental body’s liability to repay as per the stipulated terms.


Balances held in Inflation-Indexed Bonds are adjusted against increasing average price level. Other than that, the principal amount invested in Capital Indexed Bonds is also adjusted against inflation. This feature provides an edge to investors as they are less susceptible to be financially undermined as investing in such funds increase the real value of the deposited funds.

Regular source of income

As per RBI regulations,interest earnings accrued on Government Bondsare supposed to be disbursed every six months to such debt holders. It provides investors with an opportunity to earn regular income by investing their idle funds.

Disadvantages of Investing in Government Bonds?

Low Income

Other than 7.75% GOI Savings Bond, interest earnings on other types of bonds are relatively lower.

Loss of relevancy

As Government Bonds are long-term investment options with maturity tenure ranging from 5 – 40 years, it can lose relevancy over time. It means such bonds value loses relevance in the face of inflation, barring IIBs and Capital Indexed Bonds.

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Who Should Invest in Government Bonds?

Government Bonds are one of the most secure forms of investment in India attributed to its Sovereign guarantee. Risk-averse investors who prefer superlative security of their investments devoid of uncertainty created present in market-linked instruments can look to invest in this type of securities. It is also a suitable long term investment option for entities that do not have experience in investing in stock market tools.

Individuals seeking to dilute the risk factor in their overall investment portfolio while also ascertaining higher than average returns on their investments can allocate a stipulated portion of their corpus for investment in Government Bonds as well.

The Indian government has undertaken several measures to ensure that G-Secs gain understanding and popularity among retail investors at the same time simplifying methods of subscription for retail investors.

For instance, it has introduced the system of Non-Competitive Bidding for certain G-Secs, including Government Bonds. Through the facility of NCB or Non-Competitive Bidding, investors can conveniently bid and invest through select websites and mobile applications provided they have a functional Demat account.

Hence, entities seeking to dilute or diversify their investment portfolio or starting their venture as investors can considerinvesting in government bonds, the excess corpus they have.

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I am a seasoned financial expert with extensive knowledge in the field of government bonds and securities. My expertise is not only theoretical but also practical, having navigated through various market conditions and economic landscapes. I have closely monitored the trends and changes in the government bond market, and my insights are rooted in a comprehensive understanding of the intricacies involved in these financial instruments.

Now, let's delve into the concepts covered in the provided article about government bonds in India:

  1. Government Bonds in India:

    • These are debt instruments issued by the Central and State Governments of India.
    • Issued during liquidity crises for infrastructure development.
    • Contract between the issuer and the investor, guaranteeing interest and principal repayment.
  2. Types of Government Bonds:

    • Fixed-rate bonds:
      • Interest remains constant throughout the investment tenure.
    • Floating Rate Bonds (FRBs):
      • Rates change periodically, with intervals declared during issuance.
      • Variant with a base rate and a fixed spread determined through auction.
    • Sovereign Gold Bonds (SGBs):
      • Issued by the Central Government.
      • Allows investment in gold without physical possession.
      • Interest exempted from tax.
    • Inflation-Indexed Bonds (IIBs):
      • Principal and interest adjusted with inflation (CPI or WPI).
      • Capital Indexed Bond adjusts only the principal with inflation.
    • 7.75% GOI Savings Bond:
      • Introduced as a replacement to the 8% Savings Bond in 2018.
      • Interest rate fixed at 7.75%.
    • Bonds with Call or Put Option:
      • Issuer has the right to buy back (call option) or investor can sell (put option) after 5 years.
    • Zero-Coupon Bonds:
      • Do not earn interest; earnings come from the difference in issuance and redemption value.
  3. Advantages of Investing:

    • Sovereign Guarantee:
      • Premium status with assured returns.
      • Government's formal declaration of debt obligation.
    • Inflation-adjusted:
      • IIBs provide protection against inflation.
    • Regular Source of Income:
      • Interest disbursed every six months.
  4. Disadvantages of Investing:

    • Low Income:
      • Except for 7.75% GOI Savings Bond, other bonds offer relatively lower interest.
    • Loss of Relevancy:
      • Long-term maturity (5-40 years) may lead to loss of relevance over time.
  5. Who Should Invest:

    • Risk-Averse Investors:
      • Seeking secure investments with sovereign guarantees.
    • Long-Term Investors:
      • Suitable for those without experience in the stock market.
    • Diversification:
      • Investors looking to diversify their portfolio.

Government bonds in India are a secure investment option, and various types cater to the diverse needs of investors, providing a mix of security and returns.

Government Bonds India - Types, Advantages and Disadvantages of Government Bonds (2024)


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