Government Securities: G-Secs, T-Bills, SDLs, SGB

What Are Government Securities? The Big Picture

A government security is a negotiable instrument issued by the central government or a state government acknowledging its debt obligation. The word "negotiable" is important - it means the instrument can be bought and sold in the secondary market before it matures, giving investors liquidity they would not have if they simply deposited money in a fixed deposit that cannot be transferred.

In India, the Reserve Bank of India (RBI) manages the issuance of central government securities on behalf of the Government of India. It conducts auctions, maintains a registry of ownership, and oversees trading through the Negotiated Dealing System-Order Matching (NDS-OM) platform. State governments issue their own securities - called State Development Loans - also through RBI-managed auctions.

The fundamental purpose of government securities is to fund government expenditure when tax revenues fall short. Every year, the Union Budget presents the government's borrowing programme - the gross and net market borrowings planned for the year. This calendar, released by the RBI, tells the market how much the government intends to borrow and in what tenors. Similarly, state governments announce their borrowing calendars. This predictability helps institutional investors plan their investments and helps the market price the securities efficiently.

Beyond fiscal financing, government securities serve several macro-financial roles. They are the primary instrument through which the RBI conducts monetary policy - buying and selling G-Secs in open market operations (OMOs) to inject or absorb liquidity from the banking system. They serve as the benchmark risk-free rate against which all other borrowing in the economy is priced. A corporate bond, for example, is typically priced as a spread over the equivalent-maturity G-Sec yield. They are also used as collateral in the repo market, where banks borrow overnight funds from the RBI.

From a retail investor's standpoint, government securities represent one of the safest investments available in the Indian market. Because they are backed by the sovereign - the Government of India - the risk of default is considered negligible for central government securities. State government securities carry a slightly higher risk premium than central government bonds, though still far lower than corporate bonds. This safety comes at a cost, of course: yields on government securities are generally lower than what you would earn on corporate bonds or equity investments over the long run. But for capital preservation, portfolio diversification, and predictable income, they have few equals.

It is worth noting that "safe from default" does not mean "safe from all risk." Government securities carry market risk - when interest rates rise, the prices of existing bonds fall, and vice versa. A long-dated 30-year G-Sec can see significant price swings during a monetary tightening cycle. Investors who need to sell before maturity must contend with this price volatility. Those who hold to maturity, however, receive exactly what was promised: periodic interest (called coupon) and the face value at redemption. This distinction between default risk and market risk is fundamental to understanding G-Sec investing.

Types of Government Securities in India

India's government securities market is not monolithic. It encompasses several distinct instrument types, each with its own maturity, structure, and purpose. Understanding the differences is essential before deciding which instrument suits your investment horizon and goals.

Treasury Bills (T-Bills) Treasury Bills are short-term, zero-coupon money market instruments issued by the Government of India through the RBI. They come in three standard maturities: 91 days, 182 days, and 364 days. T-Bills do not pay any periodic interest. Instead, they are issued at a discount to their face value and redeemed at par. The difference between the issue price and the redemption price represents the investor's return. For example, a 91-day T-Bill might be issued at ₹98.20 and redeemed at ₹100, giving the investor a return equivalent to roughly 7.3% annualised, depending on market conditions at the time of auction.

T-Bills are the safest and most liquid of all government instruments. They are used extensively by banks, mutual funds, corporations, and institutional investors to park short-term surplus funds. The RBI auctions T-Bills every Wednesday - 91-day and 182-day T-Bills on the same day, and 364-day T-Bills are also auctioned weekly. Retail investors can now participate directly through the RBI Retail Direct platform with a minimum investment of ₹10,000 (face value).

Dated Government Securities (Central Government Bonds) Dated G-Secs are the long-term borrowing instruments of the central government. They have a fixed maturity date - ranging from 1 year to as long as 50 years - and most pay a fixed coupon rate semi-annually. The coupon is expressed as a percentage of face value (typically ₹100). So a "7.26% GS 2032" would pay ₹3.63 every six months per ₹100 of face value and return the ₹100 principal in 2032. The coupon rate is set at the time of issuance based on prevailing market conditions.

Some dated G-Secs are issued with a floating rate coupon linked to the 182-day T-Bill cut-off yield, resetting periodically. Others are inflation-indexed, where both the coupon and principal are linked to the Consumer Price Index (CPI), offering protection against inflation. The benchmark 10-year G-Sec is the most widely tracked instrument in the Indian bond market and serves as the reference rate for pricing corporate bonds and other long-term debt.

State Development Loans (SDLs) SDLs are dated securities issued by individual state governments to finance their fiscal deficits. They function identically to central government dated securities in terms of structure - fixed coupon, semi-annual payments, face value redeemed at maturity - but they carry a slightly higher yield than comparable central government bonds, typically 25–75 basis points higher, reflecting the marginally higher credit risk of state governments relative to the central government.

SDLs are actively traded on NDS-OM and are eligible as Statutory Liquidity Ratio (SLR) instruments for banks, ensuring a captive buyer base. Retail investors can also invest in SDLs through the RBI Retail Direct platform. With 28 states and 8 Union Territories potentially issuing SDLs, the market is large and varied. The RBI auctions SDLs every Tuesday on behalf of state governments.

Sovereign Gold Bonds (SGBs) Sovereign Gold Bonds are a unique hybrid instrument issued by the Government of India (through the RBI) as an alternative to holding physical gold. Each unit of an SGB is denominated in grams of gold, with a minimum investment of 1 gram. They pay a fixed interest rate (refer to the latest RBI notification for the current rate) on the nominal value, which is paid semi-annually. At maturity (8 years from the date of issue), the investor receives the prevailing gold price in rupees, making the capital return linked to gold price movements.

SGBs offer several advantages over physical gold: no storage risk, no making charges, a regular interest income, and significant tax benefits at maturity. They are listed on NSE and BSE, offering liquidity before the 8-year tenure ends, though exchange liquidity can be thin for some tranches.

Other Instruments The RBI has also issued Cash Management Bills (CMBs) - ultra-short-term instruments with maturities of less than 91 days - to meet temporary mismatches in government cash flows. These are not regular issuances and are not typically available to retail investors. Capital Indexed Bonds and Inflation Indexed Bonds (IIBs) have been issued periodically to provide inflation-linked returns, though their market has been relatively thin compared to conventional bonds.

How Are Government Securities Issued? The Primary Market

Understanding how G-Secs are created in the first place - the primary market - is important for any investor who wants to participate at the time of issuance rather than buying in the secondary market.

The Auction Mechanism The RBI issues government securities through a competitive auction process. Auctions are announced in advance with details of the amount to be raised, the tenor of the security, and the date of the auction. Bidders - primarily primary dealers, banks, insurance companies, and institutional investors - submit bids specifying the price (or yield) at which they are willing to buy a certain quantity.

There are two main types of auctions used in India:

Yield-based auctions are used for new securities. Bidders quote the yield they want, and the RBI accepts bids starting from the lowest yield (highest price) upward until the notified amount is subscribed. The cut-off yield is the yield at which the auction is fully subscribed.

Price-based auctions are used for reissuances of existing securities. Here, bidders quote prices, and the RBI accepts bids starting from the highest price downward.

In a uniform price (Dutch) auction, all successful bidders receive the security at the cut-off yield/price, regardless of what they bid. In a multiple price auction, each successful bidder pays the price corresponding to their own bid. The RBI uses both methods depending on the instrument and market conditions.

Non-Competitive Bidding To facilitate retail investor participation without requiring them to compete against sophisticated institutional players, the RBI allows non-competitive bidding for a portion of the notified amount (typically up to 5%). In a non-competitive bid, the investor simply indicates the amount they want to invest without specifying a price or yield. They receive the securities at the weighted average price or the cut-off price of the competitive auction. This is essentially how the RBI Retail Direct scheme and certain mutual fund platforms channel retail participation in primary auctions.

Who Are Primary Dealers? Primary Dealers (PDs) are specialised financial institutions - a mix of bank-PDs and standalone PDs - that have an obligation to bid in every G-Sec auction and to support the government's borrowing programme. They are required to underwrite a minimum percentage of the notified amount. In return, they get privileged access to RBI facilities and can borrow from the RBI against G-Sec collateral. PDs also play a crucial role in the secondary market, providing two-way quotes and ensuring liquidity. SEBI and RBI jointly regulate aspects of the G-Sec market.

The Issuance Calendar At the start of each financial year (April), the RBI releases a dated securities issuance calendar indicating the amounts and approximate tenors for the first half of the year (April to September), with the second half calendar released later. This transparency allows institutional investors to plan their portfolios and reduces uncertainty about government borrowing. T-Bill auction amounts are announced weekly, while SDL auctions are notified a few days before each Tuesday's auction.

How Are Government Securities Traded? The Secondary Market

Once issued in the primary market, government securities trade actively in the secondary market. This is where prices are discovered, yields move in real time, and investors can buy or sell without waiting for a new auction.

NDS-OM: The Institutional Platform The Negotiated Dealing System-Order Matching (NDS-OM) is the primary electronic trading platform for government securities in India, operated by the Clearing Corporation of India (CCIL). It is an anonymous, order-driven system where institutional participants - banks, primary dealers, insurance companies, mutual funds, and foreign portfolio investors - submit buy and sell orders, which are matched electronically. NDS-OM accounts for the bulk of secondary market volume in G-Secs. Settlement is on a T+1 basis for most transactions, with CCIL acting as the central counterparty, virtually eliminating settlement risk.

Retail investors do not have direct access to NDS-OM but can trade through the RBI Retail Direct Gilt Account, through NSE and BSE's bond trading platforms, or through broker-facilitated transactions.

Exchange Trading: NSE and BSE NSE and BSE have dedicated debt market segments where government securities are listed and traded. The NSE Wholesale Debt Market (WDM) and the Retail Debt Market (RDM) segments allow brokers and their clients to buy and sell G-Secs like any other exchange-traded instrument. Volumes on exchanges are lower than NDS-OM for institutional trades, but the exchange infrastructure makes G-Sec trading accessible to retail investors through their existing trading and demat accounts. Flattrade, for example, gives customers access to the bond market through exchange-based routes.

Sovereign Gold Bonds are listed on both NSE and BSE and trade in the equity segment, making them accessible to any investor with a demat account. The liquidity of SGBs on exchanges varies significantly by tranche - some older tranches trade actively while others have thin order books.

Price and Yield Dynamics In the secondary market, a G-Sec's price and its yield move in opposite directions. When interest rates rise - as they do during an RBI rate-hiking cycle - new bonds are issued at higher coupon rates, making existing lower-coupon bonds less attractive. Their prices fall until their yield rises to be competitive with new issuances. Conversely, when rates fall, existing high-coupon bonds become more valuable, and their prices rise.

This inverse relationship is not linear. The sensitivity of a bond's price to a change in yield depends on its duration - a measure combining the bond's maturity and the timing of its cash flows. Long-duration bonds (30-year G-Secs) are far more sensitive to yield changes than short-duration bonds (1-year T-Bills). A 1% rise in yields could cause a 15–20% fall in the price of a 30-year G-Sec, while the same move might barely affect a 91-day T-Bill.

Accrued Interest When a G-Sec is bought in the secondary market between coupon dates, the buyer pays not just the market price ("clean price") but also the interest that has accrued since the last coupon date. This additional amount is called accrued interest, and the total amount paid is called the "dirty price" or full price. The accrued interest belongs to the seller, who held the bond during that period. The buyer will receive the full next coupon payment and will have effectively been reimbursed for the accrued interest they paid.

Role of Yield Curve The G-Sec yield curve - a graph plotting yields of government bonds across different maturities - is one of the most important indicators in Indian financial markets. A normal (upward-sloping) yield curve implies that longer-term bonds yield more than shorter-term ones, reflecting the greater uncertainty and inflation risk over longer horizons. An inverted curve (short-term yields higher than long-term) can signal economic stress or aggressive monetary tightening. The shape and level of the yield curve influence bank lending rates, corporate borrowing costs, and even equity valuations.

State Development Loans: A Closer Look

State Development Loans deserve special attention because they are often overlooked in favour of central government bonds, yet they offer distinct features and opportunities for investors.

Why States Issue SDLs India's fiscal federalism means that states have significant expenditure responsibilities - healthcare, education, infrastructure, public distribution - but their own revenue sources are often insufficient to meet these needs. The Fiscal Responsibility and Budget Management (FRBM) Act places limits on how much states can borrow relative to their Gross State Domestic Product (GSDP). Within these limits, states raise resources through SDLs. The amount each state borrows in a year depends on its fiscal position, its development needs, and the limits set by the central government and the Finance Commission.

SDL Spread Over G-Secs The key distinguishing feature of SDLs is their yield premium over comparable central government dated securities. This spread, commonly called the "SDL-G-Sec spread," reflects several factors: the credit risk difference between states and the central government, the slightly lower liquidity of SDLs compared to benchmark G-Secs, and supply-demand dynamics. Historically, this spread has ranged from about 25 basis points to over 100 basis points depending on market conditions. For an investor, this spread represents additional return for the same sovereign-ish credit quality, since state governments are ultimately backed by the central government through various mechanisms.

SLR Eligibility and Captive Demand SDLs are classified as Statutory Liquidity Ratio (SLR) eligible securities. Banks in India are required to maintain a minimum percentage of their net demand and time liabilities (NDTL) in approved SLR securities, which include central government dated securities, T-Bills, and SDLs. This mandatory demand from the banking system provides a large, stable buyer base for SDLs, supporting their liquidity and prices.

Variation Across States Not all state SDLs are priced identically. States with stronger fiscal positions and lower debt-to-GSDP ratios may issue SDLs at slightly lower spreads over the benchmark, while states with larger fiscal deficits or weaker revenue profiles may need to offer higher yields. However, in practice, RBI's uniform price auctions for SDLs mean there is often a single cut-off yield for a given tenor across states in a single auction, though this has evolved over time with the RBI moving towards state-specific spreads to better reflect individual state credit quality.

Retail Access to SDLs Retail investors can invest in SDLs through the RBI Retail Direct platform in the primary market (via non-competitive bidding) and on NSE/BSE in the secondary market. SDLs have a face value of ₹10,000 in retail markets, making the minimum investment accessible. The semi-annual coupon payments and guaranteed principal repayment make SDLs a potentially attractive instrument for investors seeking regular income with sovereign-like safety and a yield pickup over central government bonds.

Tax Treatment Interest income on SDLs is fully taxable in the hands of the investor as "income from other sources" under the Income Tax Act. There is no TDS (Tax Deducted at Source) on interest from government securities held in demat form and paid through the RBI's systems, but investors must declare and pay tax on this income according to their applicable slab. Capital gains arising from the sale of SDLs in the secondary market are subject to capital gains tax - refer to the latest Finance Act for applicable rates and indexation benefits, as these have been revised in recent Budgets.

Sovereign Gold Bonds: Gold Without the Gold

Sovereign Gold Bonds are among the most innovative government-backed investment instruments in India, combining the return profile of gold with the administrative convenience of a financial security and the safety of a sovereign guarantee.

The Basic Structure SGBs are issued by the RBI on behalf of the Government of India. They are denominated in grams of gold - each unit represents 1 gram of 999 purity gold. The issue price in each tranche is based on the simple average of the closing price of gold published by the India Bullion and Jewellers Association (IBJA) for the three working days prior to the subscription period. Investors who apply online through registered banks, brokers, or the RBI Retail Direct platform typically receive a discount of ₹50 per gram on the issue price (subject to the terms of each tranche).

Interest Income Unlike physical gold, SGBs pay a fixed annual interest (refer to the latest RBI notification for current rate), credited semi-annually to the investor's bank account. This interest is calculated on the initial investment value in rupees, not on the current market value. This makes SGBs a rare instrument that combines capital appreciation potential (through gold price movements) with a regular income stream - something physical gold cannot offer.

Tenure and Liquidity SGBs have an 8-year tenure, with an option for premature redemption after the 5th year on interest payment dates. The RBI accepts premature redemption requests with advance notice. Additionally, SGBs are listed on NSE and BSE, allowing investors to sell them on the exchange before the 5-year mark if they need liquidity. However, exchange liquidity for SGBs can be limited, and the traded price on the exchange may differ from the intrinsic gold-linked value.

Tax Benefits - A Major Advantage Perhaps the most compelling feature of SGBs for long-term investors is the tax treatment at maturity. Capital gains arising on redemption of SGBs at maturity (after 8 years) are completely exempt from capital gains tax in the hands of individual investors. This is a significant advantage over gold ETFs, gold mutual funds, or physical gold, where capital gains are taxed. The semi-annual interest income, however, is taxable as per the investor's income tax slab. If SGBs are transferred before maturity (either through premature redemption after 5 years or sale on the exchange), capital gains tax applies - refer to the latest Finance Act for the applicable rates.

Limits on Investment There are annual limits on how much an individual can invest in SGBs - refer to the latest RBI notification for current limits for individuals, HUFs, trusts, and other entities. These limits are set to prevent SGBs from becoming a vehicle for large-scale speculation and to maintain the gold import substitution objective.

SGBs vs Physical Gold vs Gold ETFs For long-term investors who want gold exposure in their portfolio, SGBs compare favourably to alternatives. Physical gold involves storage costs, making charges (for jewellery), and security concerns. Gold ETFs are convenient but do not pay interest and are subject to capital gains tax. SGBs offer interest income plus capital gains tax exemption at maturity, but lock up capital for 8 years with limited exchange liquidity. Each option has its place depending on the investor's time horizon, need for liquidity, and tax situation.

Investing in G-Secs: How Retail Investors Can Participate

For many years, the government securities market was largely inaccessible to retail investors. This has changed dramatically with regulatory initiatives and technology. Today, there are multiple routes for an individual investor to buy G-Secs.

RBI Retail Direct Launched in November 2021, RBI Retail Direct is a game-changing platform that allows individual investors to open a Retail Direct Gilt (RDG) account directly with the RBI - free of charge. Eligibility requires a rupee savings bank account, a valid PAN, a valid KYC, a mobile number, and an email ID. Non-resident Indians (NRIs) are currently not eligible to open RDG accounts.

Through Retail Direct, investors can participate in primary auctions of T-Bills, dated G-Secs (central government bonds), SDLs, and SGBs via non-competitive bidding. They can also access a secondary market through the NDS-OM retail platform for buying and selling existing securities. There are no transaction charges for primary market participation. The platform is accessible through a web portal and mobile app.

Through Stock Brokers (Exchange Route) Investors can buy and sell government securities listed on NSE and BSE through their existing brokerage accounts, just like buying a share. The securities are held in the investor's demat account with NSDL or CDSL. This route is convenient for investors already active in equity markets. Brokers may charge a small transaction fee. SGBs, in particular, are commonly traded through the exchange route.

Through Mutual Funds Investors who prefer professional management and do not want to deal with individual bonds can gain exposure to government securities through debt mutual funds - specifically gilt funds (which invest predominantly in G-Secs), short duration funds, or dynamic bond funds. This route offers diversification across multiple bonds and maturities, professional interest rate management, and high liquidity (most open-ended funds allow redemption within 1-3 business days). However, it involves fund management charges (expense ratio) and does not offer the same tax predictability as holding G-Secs directly. Mutual fund investments carry market risk, and investors should read all scheme documents carefully.

Through Banks and Post Offices SGBs are available for subscription through scheduled commercial banks, designated post offices, Stock Holding Corporation of India (SHCIL), and certain brokers. Applying through a bank branch or post office requires filling out a physical application form, while applying through their net banking or digital platforms allows online subscription.

Minimum Investment Amounts For central government T-Bills and dated securities: ₹10,000 (face value) and in multiples of ₹10,000 thereafter, for retail investors via non-competitive bidding. For SDLs: ₹10,000 (face value) and in multiples of ₹10,000. For SGBs: 1 gram of gold (minimum), with upper limits per financial year.

Holding and Settlement G-Secs purchased through primary auctions via RBI Retail Direct are held in the RDG account at the RBI. Those bought on exchanges are held in the investor's demat account. Coupons are credited directly to the bank account registered with the holding account. At maturity, the principal is also credited directly to the bank account.

Yield to Maturity and Bond Pricing: What Every G-Sec Investor Must Understand

When you invest in a government security, you are not merely looking at the coupon rate printed on the bond. The more meaningful measure of return is the Yield to Maturity (YTM) - the total annualised return an investor earns if they buy the bond at the current market price, hold it to maturity, and reinvest all coupon payments at the same yield. Understanding YTM and how bond prices are determined is crucial for making informed decisions in the G-Sec market.

Coupon Rate vs Current Yield vs YTM These three terms are often confused. The coupon rate is the fixed annual interest rate stated on the bond, expressed as a percentage of face value. A 7.26% G-Sec pays ₹7.26 per year per ₹100 of face value, regardless of what the market price of the bond is.

The current yield is the annual coupon divided by the current market price. If that same bond is trading at ₹103, the current yield is 7.26/103 = 7.05%.

The Yield to Maturity is more complex - it accounts for the coupon payments, the current market price, the face value to be received at maturity, and the time remaining to maturity. It represents the internal rate of return of all future cash flows from the bond. YTM is the single most important number when comparing different bonds.

The Price-Yield Relationship Bond prices and yields move in opposite directions. This is not an arbitrary market convention - it follows from basic discounted cash flow mathematics. A bond's fair value is the present value of all its future cash flows (coupons and principal), discounted at the prevailing market yield for bonds of similar risk and maturity. When market yields rise, the discount rate applied to those future cash flows increases, making the present value - and hence the price - fall. When yields fall, prices rise.

For G-Sec investors, this means that if you buy a 10-year G-Sec when the yield is 7% and yields subsequently rise to 8%, the market price of your bond will fall. If you hold to maturity, this price fall is irrelevant - you still receive all coupons and the face value. But if you need to sell before maturity, you will realise a capital loss.

Duration: Measuring Interest Rate Sensitivity Duration is the measure of a bond's sensitivity to interest rate changes. Specifically, Modified Duration tells you approximately how much the price of a bond changes (in percentage terms) for a 1% (100 basis point) change in yield. A bond with a Modified Duration of 7 years will see its price fall by approximately 7% if yields rise by 1%. Long-maturity bonds have higher durations and are therefore more sensitive to interest rate moves.

Convexity is a second-order measure that captures the non-linearity of the price-yield relationship. Positive convexity (which all standard G-Secs have) means that price increases when yields fall are larger than price decreases when yields rise by the same amount - a favourable characteristic for bond holders.

Practical Implication for Investors An investor who plans to hold a G-Sec to maturity is largely insulated from market price risk - they will earn the YTM at the time of purchase, provided they reinvest coupons at that same rate. An investor who may need to sell before maturity must pay careful attention to duration and the likely direction of interest rates. In a rising rate environment, short-duration bonds (T-Bills, short-dated G-Secs) are preferable to minimise price risk. In a falling rate environment, long-duration bonds deliver capital appreciation on top of coupon income.

Tax Treatment of Government Securities in India

Tax treatment is a critical consideration for any investment, and government securities have a specific tax profile under Indian law that investors must understand. Note that tax rates and rules can change with each Union Budget - always refer to the latest Finance Act and consult a qualified tax advisor for personalised guidance.

Interest (Coupon) Income Interest income received from government securities - whether from T-Bills (discount income), dated G-Secs, or SDLs - is taxable as "Income from Other Sources" in the hands of the investor. It is added to the investor's total income and taxed at the applicable income tax slab rate. There is no special concessional rate for G-Sec interest income.

For T-Bills, since there is no explicit coupon, the difference between the face value received at maturity and the purchase price is treated as interest income and taxed accordingly.

For SGBs, the semi-annual interest payments are also taxable as income from other sources at the investor's slab rate.

TDS on G-Sec Interest Generally, interest on central government securities held in the SGL (Subsidiary General Ledger) accounts or in demat form does not attract TDS, as per CBDT circulars. However, investors must proactively report this income in their Income Tax Return (ITR). It is advisable to track all coupon receipts carefully and ensure accurate disclosure.

Capital Gains on Sale of G-Secs When a G-Sec is sold in the secondary market before maturity, any profit or loss over the cost of acquisition is treated as capital gain or capital loss. The tax treatment depends on the holding period:

- G-Secs held for more than 12 months are treated as long-term capital assets; gains are classified as Long-Term Capital Gains (LTCG). - G-Secs held for 12 months or less are treated as short-term capital assets; gains are Short-Term Capital Gains (STCG).

Refer to the latest Finance Act for current LTCG and STCG rates applicable to debt securities, as these have been revised in recent Budgets and the indexation benefit rules have also been amended.

SGBs: The Special Tax Advantage As discussed earlier, capital gains on redemption of SGBs at maturity (after 8 years) are fully exempt from capital gains tax for individual investors. This is one of the most tax-efficient features in any fixed income product in India and a compelling reason to consider SGBs for long-term gold exposure. Transfer of SGBs before maturity - whether through premature redemption (after 5 years) or sale on the exchange - does attract capital gains tax. Refer to the latest Finance Act for applicable rates.

Wealth Tax and Other Considerations Wealth Tax has been abolished in India. Government securities are not subject to securities transaction tax (STT). Stamp duty on transfer of government securities is governed by the Stamp Act - transactions settled through recognised exchanges and clearing corporations enjoy certain exemptions.

G-Secs in Tax Planning For high-net-worth investors in the highest tax brackets, the after-tax return on G-Secs is reduced by their marginal tax rate on coupon income. These investors may find it more efficient to access G-Secs through certain mutual fund structures (depending on current tax rules) rather than direct holding. Lower-bracket investors - retirees, for instance - may find direct G-Sec investment highly efficient since their slab rate on coupon income is low. The tax calculus has shifted with Budget amendments, so always model post-tax returns specific to your situation.

Example

Key benefits

How it works

1. 1
   Government Announces Borrowing

   The Government of India announces its annual borrowing programme in the Union Budget. The RBI then releases a detailed issuance calendar specifying tenors, amounts, and auction dates for T-Bills and dated securities.

2. 2
   RBI Conducts Auction

   On scheduled auction dates, the RBI invites bids from primary dealers, banks, and institutions (competitive bids) as well as retail investors (non-competitive bids) through designated platforms including RBI Retail Direct.

3. 3
   Price/Yield Discovery

   Competitive bids are evaluated, and the cut-off price or yield is determined. Non-competitive bidders receive securities at the weighted average price of competitive bids. Successful bidders' accounts are debited and securities are credited.

4. 4
   Securities Held in Demat/RDG Account

   Issued securities are credited to the investor's demat account (held at NSDL/CDSL via brokers) or Retail Direct Gilt account (held at RBI). Ownership is fully electronic - no physical certificates are issued.

5. 5
   Coupon Payments Credited

   On each coupon date (twice a year for dated bonds), the coupon amount is calculated on face value and credited directly to the investor's registered bank account. T-Bill investors receive face value at maturity.

6. 6
   Secondary Market Trading

   Investors can sell their G-Secs before maturity on NDS-OM (institutional), NSE/BSE exchange platforms (retail/institutional), or through the RBI Retail Direct secondary market portal. Settlement occurs on T+1 basis.

7. 7
   Maturity and Redemption

   On the maturity date, the government repays the face value of the bond. The principal is credited directly to the investor's registered bank account. For SGBs, the redemption amount is based on the prevailing gold price at the time of maturity.

Formula

Bond Price = Σ [Coupon / (1 + YTM/2)^t] + [Face Value / (1 + YTM/2)^n]
where t = each semi-annual period, n = total number of semi-annual periods to maturity, and YTM is the annualised yield to maturity.

Key takeaways

Frequently asked questions

Related terms