BackAll you need to know about government bonds purchase
Bond yields fluctuate according to the size of the government’s borrowing programme and the RBI’s monetary policy outlook
PremiumThe RBI, while announcing its policy statement on Friday, said it will allow retail investors to directly purchase government bonds by opening gilt accounts with it. Mint explains the current methods of buying these bonds, how they are taxed and what returns they give.
What kind of returns do government bonds give?
The current yield on the 10-year government bond (G-Sec) is 6.126%. In other words, if you hold the bond for 10 years, you will get a return of 6.126% per annum. The yield fluctuates according to the size of the government’s borrowing programme and the RBI’s monetary policy outlook.
Also Read | Vaccination drive picks up slowly
There are also government bonds of shorter tenors than 10 years such as treasury bills (those with maturity of 365 days or less). These tend to have lower yields. Apart from these, you can also buy the Government of India (Taxable) Savings Bonds which pay a floating interest rate linked to the rate on National Savings Certificates (NSCs). This rate is currently 7.15% and it is revised every six months based on the NSC rate. You can buy these Government of India (Taxable) Savings Bonds through certain designated banks such as SBI, HDFC Bank, ICICI Bank, Axis Bank and others.
How are returns on government bonds taxed?
Interest on government bonds is taxable at slab rate. There are certain bonds with tax-free interest that were issued by public sector enterprises such as Rural Electrification Corporation (REC) or Housing Development Corporation (HUDCO). These can be bought on the secondary market. However, the yields on these tax-free bonds are a lot lower than those on taxable bonds. If you sell a listed bond (including a government bond) within one year, the capital gain is taxed at slab rate. If you sell it after one year, the gains are taxed as Long Term Capital Gains (LTCG) at 10%. However, you do not get the benefit of indexation.
What are the risks involved?
Government bonds have almost no risk of default. However their prices change according to interest rate changes in the economy (called duration risk). The longer dated the bond is, the more sensitive its price is to interest rate movements. A rise in interest rate lowers the price of the bond and vice versa. These price movements however are not relevant if you buy the bond and hold it to maturity. Another risk is that the return on the bond does not exceed the rate of inflation. For instance if the interest rate on the bond is 6% and inflation is 7%, your money locked in the bond will get eroded by inflation.
Can retail investors buy government bonds?
Yes. At present the most common route for retail investors to buy government bonds is government securities (gilt) mutual funds. These are mutual funds which in turn invest in government securities. However, such funds charge an expense ratio which slightly reduces the return that investors get. Apart from gilt funds, retail investors can purchase government bonds by registering themselves on stock exchanges for non-competitive bids. In this route, you do not need a stock broker and can submit your order directly through the exchange. You do need a demat account to hold the bonds however. Finally investors can purchase government bonds through stock brokers by participating in the non-competitive bidding window. What ‘non competitive’ means is that the yield is determined through the bids of institutional investors and retail investors are allotted the bonds at the market-determined yield.
What is the RBI proposal for retail participation in government bonds?
The RBI has allowed retail investors to open gilt accounts with the RBI. “It is proposed to provide retail investors with online access to the government securities market (primary and secondary) through the RBI (Retail Direct)," the RBI governor’s statement said. The detailed modalities of this route have not yet been published. These will be released separately, the central bank said.
Milestone Alert!Livemint tops charts as the fastest growing news website in the world 🌏 Click here to know more.
