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How to Buy Government Bonds in India?

Investing in bonds is becoming a popular option for portfolio diversification. Bonds offer fixed returns as well as frequent interest payouts. Even within bonds, government bonds are held in high regard because of their strong rating. Read on to know what are govt bonds in India and how to buy them.

What are Government Bonds in India?

Government bonds are fixed-income securities issued by the Central or State Government of India. These bonds allow the government to raise capital from several investors to execute financial, development, and wellness programs.  

Since these programs last for the short to long term, the bonds have a tenure that ranges from a few months to several years. Investors who hold the bond during the tenure are incentivized with fixed interest payments. 

This interest is known as the coupon rate, which is the guaranteed gain that an investor will get in proportion to the principal. Each Gsec has a different interest payout schedule ranging from quarterly to yearly installments. 

Much like any bond, Gsecs also carry a credit rating. If you check any website, including Dhan, you’ll see SOV in front of a Gsec rating. We’ll talk about the meaning of this rating later on. 

For now, know that government bonds are considered more secure than others like corporate bonds. The reason is the government backing as well as the sovereign credit rating.  

Highlights of Government Bonds

  • The goal of government bonds is to raise funds for different purposes such as supporting social welfare schemes or meeting budgetary deficits. 
  • The Indian government issues different types of bonds, including treasury bills, dated government securities, and state development loans. 
  • All Gsecs with less than 1-year validity are called Treasury Bills (T-Bills) and those with more than 1-year validity are called bonds.
  • Their tenure and maturity can extend up to decades, making them a potential option for long-term financial goals.
  • Some government bonds offer income tax benefits on the interest income. 
  • Government bonds enjoy good liquidity and can be traded using Dhan or NDS-OM.
  • Gsecs are considered to be safer than other bonds because of their sovereign credit rating, which means that the likelihood of the government defaulting on credit is low

Types of Government Bonds in India

Here are some of the most popular government bonds in India for you to choose from:  

1. 7.75% Government of India Savings Bond

These bonds used to offer a fixed interest of 7.75% per annum and had a maturity period of 7 years. The 7.75% Government of India Savings Bonds were not tradable in the secondary market. 

The interest earned on these government bonds was taxable. These bonds have been replaced with Floating Rate Savings Bonds that offer 7.15% interest per annum. 

2. Zero-Coupon Bonds

These government bonds are issued at a discounted price compared to their original face value. You are not offered any regular interest payments against the bonds. 

On maturity, you will receive the full face value of the bond. If you are looking for a fixed return on your investment, then these bonds can be a good option. 

3. Sovereign Gold Bonds (SGBs)

The Reserve Bank of India (RBI) is responsive to issue SGBs. These bonds are offered as an alternative to physical gold. They come with a fixed term of 8 years and an exit option after the fifth year. You earn an annual interest of 2.5% plus any profits from changes in gold prices in the retail market. 

4. Inflation-indexed Bonds

These bonds are popular for offering protection against the effects of inflation. To make sure that you receive a real rate of return, the current inflation rate is factored into adjusting the principal price of these bonds. 

5. Fixed Rate Bonds

These are the regular version of government bonds that carry a fixed interest and tenure. The interest payout is periodical, ranging from monthly, half-yearly, to yearly. 

Where to Buy Government Bonds in India?

There are two options available for you to buy government bonds in India. 

1. Primary Market

The primary market, also known as the issue market, is the place where you can apply with the issuer directly. 

In the primary market, you can apply for a Bond IPO (Initial Public Offer). The bonds will be allocated after analyzing your bid as per the applicable terms and conditions.

You can also apply for bonds through private placement. In this case, the issuer will offer the bonds to a group of institutional investors

2. Secondary Market

The secondary market, or the after-issue market, is the platform where you can purchase bonds from other traders and investors. 

There is no application process to be followed here as the bonds are credited to your demat account as soon as the settlement is complete.

How to Buy Government Bonds in India?

Now that you know all about government bonds, it is time to learn how to buy govt bonds in India. Here, we’ll discuss the steps you must follow to buy these bonds:

Through a Broker

  • Select a registered stockbroker like Dhan that offers the option to invest in government bonds. 
  • Complete the KYC process and open your trading account.
  • Undertake in-depth research to find out the suitable government bond options available in the market. 
  • You must factor in aspects like coupon rates, risk levels, credit ratings etc. 
  • You can place the order as soon as your trading account is activated. 
  • The bonds will be credited to your Demat account when the settlement is concluded. 

Through RBI 

  • Visit the official RBI website and then navigate to the RBI Retail Direct portal. 
  • Complete the KYC process by submitting the documents to open a Gilt Securities Account – ‘Retail Direct Gilt (RDG)’. 
  • After your account has been activated, you can explore different types of bonds available for investment. 
  • Now, click on the ‘Bid Entry’ option and enter the bid amount for the bonds that meet your objectives.  
  • Make sure your account has enough balance to complete the transaction, or else the bid will be rejected. 
  • If your bid is accepted, then you receive either a full allotment or a partial allotment, based on the total number of bids received.

You can use the RBI Retail Direct portal to buy or sell government securities in the secondary market as well. 

Conclusion

With several options to choose from and multiple benefits on offer, government bonds are a good investment option. 

Once you know how to buy government bonds in India, you can go ahead and start investing your money in an informed manner. In fact, there are bond funds that hold Gsecs in their portfolio, allowing you to access a basket of government bonds in just one mutual fund investment. 

To explore popular Gsec bond options in India as well as bond funds (coming soon!), become a Dhan user today.  

Shriram Shekhar

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