Bonds are debt instruments in which the authorized issuer owes the bond holders a debt. Depending on the terms of the type of bonds, the authorized issuer is obliged to pay interest and/or repay the principal at a later date upon maturity. In simpler terms, a bond is a formal contract to repay borrowed money with an interest at fixed intervals. Investment bonds are a way to raise money. When you purchase any type of bond (government, convertible, callable, etc.), you are lending money to the issuer which may be a corporation, the government, a federal agency or any other entity. In return, the issuer promises to pay a specified rate of interest during the life of the bond. The issuer also repays the face value of the bond when upon maturity of the term.
Bonds enable you to earn far better value from your investment with guaranteed higher fixed returns than fixed deposits. Following are different types of bonds you can invest in India;
Bonds issued by the Central and State Governments are called Government security. Since these are issued by Governments, they carry no credit risk. These are one of the safest types of investment options in India to earn periodic interests and principal on maturity. These bonds pay interest on semi-annual basis.
These are bonds issued by various corporates for their financing needs and hence carry credit risk. The holder of the bonds earns regular interest income. and principal amount at maturity. Corporate bonds pay higher interest than Bank FD’s and Government bonds.
These types of bonds aim at minimizing the impact of inflation on the face value and coupon payments. The principal is adjusted according to the inflation and coupon payments are made based on the adjusted principal. Inflation indexed bonds are an efficient way to counter the inflation risk.
The investors holding convertible bonds get the right to convert the bond to a predefined number of equity shares in the issuing company at a particular time from the tenure. Though, the investor can also opt to receive the principal repayment at the maturity, if they don’t want to exchange it with shares.
Sovereign Gold Bond
The Government of India also issues sovereign Gold Bonds. Gold bonds are in form of a security as it in the form of the Government of India stock. It also carries interest rate which is paid regularly and has zero risk of handling that exists in physical gold.
The Government of India decided to issue 7.75% Taxable Bonds, 2018, with effect from January 10, 2018 for enabling resident citizens/HUF to invest in a taxable bond, without any monetary ceiling.
Capital Gains Bonds
Capital gain bonds or 54EC bonds are the fixed income instruments that offers you tax exemption from Capital Gains Tax under Section 54EC of the Income Tax Act, 1961, for up to 6 months from the sale of the asset sold.
It means that an individual need to invest in capital gains bonds within 6 months from the transfer of capital assets.
Bonds eligible under Section 54EC of the Income Tax Act, 1961 are issued by:
- NHAI (National Highways Authority of India)
- RECL (Rural Electrification Corporation Ltd)