Government bonds have longer tenure and offer higher returns compared to bank fixed deposit schemes. Here’s how buy them and other alternative to these investment instruments
Government bonds are considered safe investment instruments. You can buy them through the Reserve Bank of India’s (RBI) Retail Direct portal. Unlike banks, the long-term government bonds offer a relatively higher interest rate and an extended tenure that can run up to 40 years.
For example, a government bond, issued in February and maturing in 2029, offered 7.10 per cent interest rate, far exceeding bank s typical fixed deposit rates for a six-year term. However, the interest rates of government bonds are typically lower than other investment instruments, such as corporate bonds or stocks, etc., that come with higher risk. Also, the government bonds are not as liquid as other types of investments.
Long-term government securities have maturities of seven years or more, with no lock-in period as they can be traded in the secondary market. Trading in the secondary market may have some risks as the bond prices may fall. Additionally, premature withdrawal is permitted based on the investor's age. For instance, those above 60 are allowed to withdraw after four or five years, subject to the bond features. Furthermore, interest earn from bond trading is taxable.
How To Buy Government Bonds
One can buy government bonds in India through banks, post offices, brokerage firms, gilt mutual funds and the RBI’s retail direct platform. You will need to open demat or a trading account with a brokerage firm if you buy bonds through a brokerage firm. If you buy the government bonds through a gilt mutual fund, you may have to incur cost for the AMC’s fund management.
RBI retail direct enables individuals to directly invest in G-Secs, but they must first register or open an account on the Retail Direct Gilt (RDG) portal for the transactions. Also, unlike brokerage accounts, there are no fees for RDG account opening and any maintenance costs.
Other Alternatives To These Bonds
RBI also issues floating rate bonds (FRBs) with variable interest rates. FRBs currently offer 7.35 per cent interest rate annually. They have a lock-in period of seven years and their rates are typically revised in six months based on the yields on the national savings certificates (NSCs). As a result, income from these bonds is not fixed as they vary with the changes in the NSC rates. The minimum investment amount is Rs. 1,000 with no maximum limit. Interest is paid semi-annually in January and July.
The Senior Citizens Savings Scheme (SCSS) provides an interest rate of 8.2 per cent, with a maximum investment limit of Rs. 30 lakh. SCSS offers quarterly payouts and allows premature withdrawal with penalties. It also offers tax benefits under Section 80C. It is designed for seniors seeking regular income.
The Post Office Monthly Income Scheme (POMIS) offers a regular monthly income, with an interest rate of 7.4 per cent. It has a maximum investment limit of Rs. 15 lakh and allows premature withdrawal with penalties. Interest income enjoys tax deduction up to Rs. 50,000 under section 80TTB.