Government bonds (GBs)

Government bonds (GBs)

Government bonds are debt securities issued by the government to raise money from the public. These bonds are considered to be low-risk investments since they are backed by the government's ability to tax and print money.

Why Government bonds are issued?

Governments issue government bonds as a way to raise funds for various purposes, such as financing budget deficits, infrastructure development, or other government programs. Government bonds are essentially loans that are issued to investors, who provide the government with a lump sum of money in exchange for the promise of regular interest payments and the repayment of the principal amount at maturity.

There are several reasons why governments may choose to issue bonds instead of other forms of borrowing:

Lower interest rates: Government bonds generally have lower interest rates than other types of borrowing, such as bank loans or corporate bonds. This is because government bonds are considered to be very low-risk investments, as the government is seen as being unlikely to default on its debt.

Large amounts of funding: Governments may need to raise very large amounts of money for various projects or programs, which may be difficult to do through other forms of borrowing. Issuing bonds allows the government to raise large sums of money from a broad range of investors.

Flexibility: Government bonds can be issued with a variety of maturities, from short-term bonds that mature in a few months to long-term bonds that mature in 30 years or more. This allows governments to match the maturity of their debt to the needs of their programs and the preferences of investors.

Economic stability: Issuing bonds can help to stabilize the economy by providing a source of funding that is independent of short-term fluctuations in tax revenues or other sources of government income. This can help to smooth out the impact of economic cycles and provide a stable source of funding for government programs over time.

Overall, government bonds are an important tool for governments to raise funds and finance their programs and projects, while also providing investors with a safe and reliable investment option.

Different major types of government bonds:

S.No.	types of government bonds	Investment Horizon	Interest Rate	Maturity Period
1	Treasury bills (T-bills):	Short-term government bonds	3-5%	one year or less
2	Treasury notes (T-notes):	Medium-term government bonds	6-7%	2 to 10 years
3	Treasury bonds (T-bonds	Long-term government bonds	6-8%	10 to 30 years.
4	Savings bonds (Ex.- NSC and KVP)	Bonds issued to individual investors	6-8%	NSC VIII Issue is 5 years, while the horizon for NSC IX Issue is 10 years. KVP has a fixed horizon of 124 months (10 years and 4 months)
5	Municipal bonds	Bonds issued by state or local governments to fund infrastructure projects such as schools, hospitals, roads, and bridges	6-9%	5 to 15 years

Some of the top municipal bonds issued in India in recent years include:

1. Pune Municipal Corporation's Rs 200 crore bond issue in 2021 with a coupon rate of 6.45% and a maturity of 10 years.
2. Ahmedabad Municipal Corporation's Rs 200 crore bond issue in 2020 with a coupon rate of 7.19% and a maturity of 10 years.
3. Hyderabad Municipal Corporation's Rs 200 crore bond issue in 2019 with a coupon rate of 8.9% and a maturity of 10 years.
4. Greater Visakhapatnam Municipal Corporation's Rs 100 crore bond issue in 2018 with a coupon rate of 8.1% and a maturity of 10 years.

Maturity Gains

The returns on government bonds depend on the type of bond, the term, and the prevailing interest rates. Generally, longer-term government bonds offer higher returns than short-term government bonds, but they also carry more risk.

How To Invest in Govt.Bonds ?

To invest in government bonds, you can purchase them through a brokerage firm or through the Reserve Bank of India (RBI). You will need to open a demat account with a brokerage firm to invest in government bonds.

Why one should invest in Govt.Bonds

There are several reasons to invest in government bonds, including:

Low-risk investment: Government bonds are considered to be low-risk investments since they are backed by the government's ability to tax and print money.

Guaranteed returns: Government bonds offer a fixed rate of return, making them a good option for investors who want a predictable income stream.

Diversification: Investing in government bonds can help diversify your investment portfolio and reduce overall risk.

Capital preservation: Investing in government bonds can help preserve your capital since they are considered to be safe investments.

10 best options for investing in government bonds in India:

1. 7.15% Government of India Savings (Taxable) Bonds, 2021
2. National Savings Certificate (NSC)
3. Kisan Vikas Patra (KVP)
4. Post Office Monthly Income Scheme (POMIS)
5. Sukanya Samriddhi Yojana
6. Post Office Time Deposit
7. Senior Citizen Savings Scheme (SCSS)
8. Public Provident Fund (PPF)
9. Fixed Deposit (FD)
10. Sovereign Gold Bond (SGB)

How to get maturity returns on govt. bonds

To get maturity returns on government bonds, you need to hold the bonds until their maturity date. When the bond matures, the principal amount invested is returned to the investor along with the final interest payment.

 Tax liabilities 

The tax liabilities on bonds in India depend on the type of bond and the holding period. Here are the tax implications for some common types of government bonds in India:

Treasury bills (T-bills): The interest earned on T-bills is taxable as income in the year it is received. T-bills held for less than one year are considered short-term capital assets and are taxed at the investor's applicable income tax rate. T-bills held for more than one year are considered long-term capital assets and are taxed at a flat rate of 20%.

Treasury notes (T-notes): The interest earned on T-notes is taxable as income in the year it is received. T-notes held for less than three years are considered short-term capital assets and are taxed at the investor's applicable income tax rate. T-notes held for more than three years are considered long-term capital assets and are taxed at a flat rate of 20%.

Treasury bonds (T-bonds): The interest earned on T-bonds is taxable as income in the year it is received. T-bonds held for less than one year are considered short-term capital assets and are taxed at the investor's applicable income tax rate. T-bonds held for more than one year are considered long-term capital assets and are taxed at a flat rate of 20%.

Savings bonds: The interest earned on savings bonds is taxable as income in the year it is received. Savings bonds held for less than one year are considered short-term capital assets and are taxed at the investor's applicable income tax rate. Savings bonds held for more than one year are considered long-term capital assets and are taxed at a flat rate of 20%.

Interest income earned from government bonds is taxable under the Income Tax Act, 1961. The tax liability on interest income from government bonds is calculated as per the income tax slab rate of the bondholder.

If the government bond is held for less than three years, any capital gains arising from the sale of the bond will be treated as short-term capital gains and will be taxed as per the income tax slab rate of the bondholder.

If the bond is held for more than three years, any capital gains arising from the sale of the bond will be treated as long-term capital gains and will be taxed at a flat rate of 20%.In addition, if the government bond is held in a Demat account, there will be no tax deduction at source (TDS) on the interest income. However, if the bond is held in physical form, TDS will be deducted on the interest income if it exceeds Rs. 10,000 in a financial year.

what is the meaning of rising bond yield

The bond yield is the return an investor gets from holding a bond. It is expressed as a percentage of the bond's face value or the amount paid for the bond. When bond prices rise, the yield falls, and when bond prices fall, the yield rises.

Conversely, when bond prices fall, the bond yield rises. This is because as the bond price falls, the investor would earn more interest on the bond when compared to the amount he invested initially. As the yield on a bond rises, it indicates that the bond is becoming less valuable, and its price is decreasing.

Therefore, when we talk about rising bond yields, it means that the interest rates on the bonds are going up. This usually happens when there is an increase in demand for credit or a rise in inflation expectations, which leads to higher interest rates in the market.

Rising bond yields can have implications for various market participants, including investors, borrowers, and governments. Investors who hold bonds may experience capital losses as bond prices fall, and borrowers may have to pay higher interest rates on new loans. Governments may face higher borrowing costs, which can impact their ability to finance their programs and projects.

here's an example of how rising bond yields can impact the price of a bond:

Let's say an investor buys a bond with a face value of $1,000 and an interest rate of 3% per year. This means that the investor will receive $30 in interest payments each year until the bond matures.

Now let's assume that interest rates in the market start to rise, and new bonds with similar risk profiles are now being issued with an interest rate of 4% per year. As a result, the demand for the investor's bond decreases because it is now paying a lower interest rate than what is available in the market.

In order to attract investors, the price of the bond will need to decrease until the bond yield matches the new market interest rate of 4%. The bond yield is calculated by dividing the annual interest payments by the bond's current price.

So, if the investor's bond price falls to $925, the yield will be 4%, which is the new market interest rate. This means that the investor is now receiving a lower price for the bond, but is earning the same return on investment as the newer bonds with higher interest rates. Conversely, if interest rates fall, the bond price will rise, and the yield will fall.

why it is not considered a good investment for individuals

While government bonds are considered to be low-risk investments, they may not offer the high returns that some investors seek. Additionally, government bonds may not keep up with inflation, which can erode the purchasing power of your investment over time.

Furthermore, government bonds are subject to interest rate risk. If interest rates rise, the value of existing bonds will decrease, which could result in a loss if you need to sell before maturity.

Therefore, while government bonds may be a suitable investment for some investors who prioritize capital preservation and low risk, they may not be ideal for those seeking higher returns or those who want to beat inflation. It is important to consider your investment goals, risk tolerance, and time horizon before making any investment decisions.