A Complete Guide to Bonds & Fixed-Income Investments in India
- Finomic Insights
- Mar 24
- 21 min read
Bonds and fixed-income investments play a crucial role in wealth management, offering investors a steady source of income with relatively lower risk compared to equities. Whether you are a conservative investor looking for stability or someone seeking diversification in your portfolio, bonds provide an excellent investment avenue. In this blog, we will explore all types of bonds and fixed-income instruments available in India, along with recent examples to help you make informed investment decisions.
Understanding Bonds and Fixed-Income Investments
A bond is a financial instrument where an investor lends money to a borrower, usually a government or corporation, for a fixed period in exchange for periodic interest payments and repayment of principal at maturity. Fixed-income investments are financial assets that provide predictable returns, making them an attractive option for risk-averse investors.
In India, bonds can be broadly classified into the following categories:
Government Bonds & Securities
Government bonds, also known as Government Securities (G-Secs), are debt instruments issued by the central and state governments to finance their fiscal needs. These bonds are considered among the safest investment options since they are backed by the government. Investors looking for stable returns and minimal risk often turn to these securities. Below, we explore the different types of government bonds available in India:
1. Treasury Bills (T-Bills)
Treasury Bills (T-Bills) are short-term, zero-coupon securities issued by the Reserve Bank of India (RBI) on behalf of the Government of India to meet short-term funding needs. Available in maturities of 91 days, 182 days, and 364 days, they don’t pay periodic interest. Instead, you buy them at a discount and redeem them at face value—the difference is your return.
Features:
Maturity: 91 days, 182 days, or 364 days.
Face Value: Typically ₹25,000 or multiples thereof.
Minimum Investment: ₹25,000 (recent auctions as per RBI norms).
Issued via: Auction by RBI (weekly for 91-day, fortnightly for others).
Benefits:
Safety: Backed by the Government of India—zero default risk.
Liquidity: Highly tradable in the secondary market via NDS-OM (Negotiated Dealing System-Order Matching).
Short-Term: Ideal for parking funds temporarily.
Risks:
Interest Rate Risk: If rates rise, the discount rate may not compete with newer instruments.
Low Returns: Yields (e.g., 6.5-7% annualized in 2025) are modest compared to equities or corporate bonds.
Inflation Risk: Fixed returns may not beat inflation.
Taxation:
The profit (face value minus purchase price) is taxed as interest income under “Income from Other Sources” at your slab rate (e.g., 5%, 20%, or 30% plus cess).
No tax deductions or exemptions apply.
No TDS (Tax Deducted at Source) is applicable, but you must declare it in your ITR.
How to Invest:
Through RBI Retail Direct: Open an account at RBI Retail Direct, link your bank, and bid in auctions.
Via Banks/Primary Dealers: Submit bids through your bank during RBI auctions.
Secondary Market: Buy from stock exchanges (e.g., NSE) via a demat account and broker.
Auction Schedule: Check RBI’s website for dates (e.g., 91-day T-Bills every Wednesday).
Example:
91-Day T-Bill (March 2025 Auction): Issued at ₹98,500, face value ₹1,00,000. Yield ~6.8% annualized. Profit of ₹1,500 taxed at slab rate (e.g., ₹450 tax at 30%).
Note:
Best for HNIs, corporates, or individuals with surplus cash needing safety over high returns.
Yields fluctuate based on RBI’s monetary policy—watch repo rate trends.
2. Long-Term Government Bonds
Long-Term Government Bonds, or G-Secs, are debt instruments issued by the central government with maturities ranging from 5 to 40 years. They pay semi-annual interest (coupon) and return principal at maturity, funding infrastructure and fiscal deficits.
Features:
Maturity: 5 to 40 years (e.g., 10-year, 30-year bonds).
Coupon Rate: Fixed (e.g., 7.10% p.a.).
Face Value: ₹1,000 or multiples.
Minimum Investment: ₹10,000 via RBI Retail Direct.
Latest Change: Finance Act 2024 removed indexation benefits for LTCG, taxing at 12.5%.
Benefits:
Guaranteed Returns: Fixed coupon and principal repayment.
Safety: Sovereign backing—no default risk.
Portfolio Stability: Balances equity-heavy portfolios.
Risks:
Interest Rate Risk: Bond prices fall if rates rise (e.g., a 7% bond loses value if new bonds offer 8%).
Liquidity Risk: Secondary market trading may have low volumes.
Inflation Risk: Fixed returns may erode purchasing power.
Taxation:
Interest: Taxed as interest income at slab rates (e.g., ₹7,100 on ₹1 lakh at 7.1% taxed fully).
Capital Gains: On sale before maturity:
STCG: <36 months, taxed at slab rates.
LTCG: >36 months, 12.5% without indexation (post-2024 rule change).
No TDS on interest for resident individuals.
How to Invest:
RBI Retail Direct: Register, bid in auctions, or buy from the gilt account.
Stock Exchanges: Via NSE/BSE through a demat account.
Banks: Approach primary dealers like SBI for new issues.
Tip: Check RBI’s auction calendar (e.g., monthly G-Sec auctions).
Example:
7.10% Government of India Bond 2030: Issued in 2020, matures 2030. Pays ₹3,550 semi-annually on ₹1 lakh. Current yield ~7.2% (March 2025 market price).
Note:
Ideal for retirees or long-term investors seeking predictable income.
Use a bond ladder strategy to manage rate risk.
3. Sovereign Gold Bonds (SGBs)
Sovereign Gold Bonds (SGBs) are RBI-issued securities denominated in grams of gold (999 purity). They pay 2.5% p.a. interest, mature in 8 years, and track gold prices, offering a paper alternative to physical gold.
Features:
Tenure: 8 years, with exit option after 5th year.
Interest: 2.5% p.a., paid semi-annually.
Denomination: 1 gram of gold (minimum ₹1 gram, max 4 kg for individuals).
Latest Change: 2025 tranche increased issuance frequency to quarterly.
Benefits:
Gold + Interest: Capital appreciation + 2.5% bonus.
No Storage Hassle: No lockers or theft risk.
Tax-Free Maturity: Gains at redemption are exempt.
Risks:
Gold Price Volatility: Returns drop if gold prices fall.
Liquidity: Secondary market trading is thin.
Long Lock-In: 5-8 years ties up funds.
Taxation:
Interest: Taxed at slab rates (e.g., ₹2,500 on 1 kg at ₹1 lakh taxed fully).
Capital Gains:
At Maturity: Fully tax-exempt for individuals.
Early Sale: STCG (<12 months) at slab rates; LTCG (>12 months) at 12.5% without indexation.
No TDS on interest.
How to Invest:
RBI Retail Direct: Apply during tranche windows.
Banks/Post Offices: SBI, HDFC, etc., offer forms during issuance.
Stock Exchanges: Trade existing SGBs via demat.
Next Tranche: Check RBI’s website (e.g., April 2025 expected).
Example:
SGB Series VIII 2024-25: Issued November 2024 at ₹7,500/gram. ₹75,000 (10 grams) earns ₹1,875 interest p.a., matures 2032 with tax-free gains.
Note:
Best for gold lovers wanting safety and income.
Compare with gold ETFs for liquidity trade-offs.
4. Inflation-Indexed Bonds (IIBs)
Inflation-Indexed Bonds (IIBs) protect against inflation by adjusting principal and interest based on the Consumer Price Index (CPI). Last reintroduced in 2013, they’re rare but may see a revival in 2025 per RBI hints.
Features:
Tenure: Typically 10 years.
Interest: Fixed real rate (e.g., 1.5%) + CPI inflation adjustment.
Principal: Adjusted for inflation, paid at maturity.
Latest Change: No new issuances since 2013; potential relaunch in 2025.
Benefits:
Inflation Protection: Real returns above inflation.
Safety: Government-backed.
Long-Term Hedge: Shields purchasing power.
Risks:
Low Liquidity: Thin secondary market.
Complexity: Returns vary with CPI, hard to predict.
Availability: Limited issuance.
Taxation:
Interest: Inflation-adjusted interest taxed at slab rates.
Capital Gains: STCG (<36 months) at slab rates; LTCG (>36 months) at 12.5%.
No TDS for residents.
How to Invest:
Primary: Await RBI auctions (watch 2025 announcements).
Secondary: Via NSE/BSE if old bonds are traded.
Tip: Use a demat account for ease.
Example:
10-Year IIB (2013 Issue): ₹1 lakh principal, 1.5% real rate + 4% CPI = ₹5,500 interest p.a. (taxed). Matured in 2023.
Note:
Ideal for inflation-conscious investors.
Monitor RBI policy for reintroduction.
5. Floating Rate Bonds (FRBs)
Floating Rate Bonds have interest rates that reset periodically based on market conditions. This ensures that investors benefit from rising interest rates, making them an attractive option when interest rates are expected to increase.
Features:
Tenure: 7-10 years typically.
Interest: Base rate (e.g., 6%) + spread (e.g., 0.5%), reset semi-annually.
Latest Change: RBI FRB 2034 issued in 2024 at higher spreads.
Benefits:
Rate Flexibility: Rises with market rates.
Safety: Government-backed.
Predictable Income: Regular payouts.
Risks:
Rate Decline: Returns fall if rates drop.
Market Risk: Prices fluctuate if sold early.
Taxation:
Interest: Taxed at slab rates (variable each reset).
Capital Gains: STCG (<36 months) at slab rates; LTCG (>36 months) at 12.5%.
No TDS.
How to Invest:
RBI Retail Direct: Bid in auctions.
Stock Exchanges: Trade via demat.
Next Auction: Check RBI’s calendar (e.g., June 2025).
Example:
RBI FRB 2034: Issued 2024, current rate 7.2% (6.7% base + 0.5% spread). ₹7,200 p.a. on ₹1 lakh, taxed per slab.
Note:
Suits rising-rate environments.
Compare with fixed-rate G-Secs for stability.
6. State Development Loans (SDLs)
State Development Loans are bonds issued by state governments to fund various development projects (e.g., roads, schools). These bonds usually offer higher interest rates compared to central government bonds to attract investors.
Features:
Tenure: 5-15 years typically.
Coupon Rate: Fixed (e.g., 7.5-8%).
Minimum Investment: ₹10,000.
Latest Change: SDL issuance rose in 2025 to fund state deficits.
Benefits:
Higher Yields: 0.25-0.5% above G-Secs.
Safety: Near-sovereign backing (central government support).
Regular Income: Semi-annual interest.
Risks:
State Risk: Rare chance of fiscal stress.
Liquidity: Lower than G-Secs in secondary market.
Taxation:
Interest: Taxed at slab rates.
Capital Gains: STCG (<36 months) at slab rates; LTCG (>36 months) at 12.5%.
No TDS.
How to Invest:
RBI Retail Direct: Participate in state auctions.
Stock Exchanges: Via NSE/BSE.
Tip: Check RBI’s SDL auction schedule.
Example:
West Bengal SDL 2027 (7.5%): ₹1 lakh earns ₹7,500 p.a., matures 2027. Yield ~7.6% in March 2025.
Note:
Great for slightly higher returns with safety.
Diversify across states to spread risk.
Corporate Bonds
Corporate bonds are debt securities issued by companies to raise capital for business expansion, operations, or other financial needs. Unlike government bonds, corporate bonds come with different risk profiles based on the issuing company’s financial strength. Below are the key types of corporate bonds available in India:
1. Secured Bonds
Secured Bonds are debt instruments issued by companies, backed by specific assets (e.g., land, machinery) as collateral. If the issuer defaults, bondholders can claim these assets, making them safer than unsecured options.
Features:
Tenure: 1-15 years, typically 3-10 years.
Interest Rate: Fixed (e.g., 7-9% p.a.), paid annually/semi-annually.
Minimum Investment: ₹10,000 or as per issue terms.
Latest Change: SEBI tightened disclosure norms in 2024, mandating quarterly asset cover reports.
Benefits:
Safety Net: Collateral reduces loss risk in default.
Stable Returns: Higher than G-Secs (e.g., 8% vs. 7%).
Regular Income: Predictable interest payouts.
Risks:
Issuer Risk: Default still possible if assets depreciate.
Liquidity Risk: Secondary market trading may be thin.
Interest Rate Risk: Prices drop if rates rise.
Taxation:
Interest: Taxed as interest income under “Income from Other Sources” at slab rates (e.g., 5%, 20%, 30% + cess).
Capital Gains: On sale before maturity:
STCG: <36 months, taxed at slab rates.
LTCG: >36 months, 12.5% without indexation (post-Finance Act 2024).
TDS: 10% if interest exceeds ₹5,000 p.a. (waived if Form 15G/H submitted).
How to Invest:
Public Issue: Apply during bond offerings via banks, brokers, or online platforms (e.g., Zerodha, HDFC Securities).
Stock Exchanges: Buy listed bonds via NSE/BSE using a demat account.
Private Placement: For HNIs via financial advisors.
Tip: Check credit rating (e.g., AAA by CRISIL) for safety.
Example:
HDFC Ltd. Secured NCD (March 2025): 8.10% p.a., 5-year tenure, ₹1 lakh earns ₹8,100 annually (taxed at slab). AAA-rated, backed by property assets.
Note:
Ideal for conservative investors wanting higher yields with a safety cushion.
Verify asset quality and issuer financials before investing.
2. Unsecured Bonds
Unsecured bonds are not backed by any collateral, making them riskier than secured bonds. However, they offer higher interest rates to compensate for the added risk.
Features:
Tenure: 1-10 years, often 3-7 years.
Interest Rate: Fixed, typically 8-10% p.a.
Minimum Investment: ₹10,000 or as specified.
Latest Change: SEBI’s 2025 rules require higher risk disclosures for unsecured issuances.
Benefits:
Higher Yields: Outpace secured bonds (e.g., 9% vs. 8%).
Income Stream: Regular interest payments.
Portfolio Boost: Diversifies fixed-income holdings.
Risks:
Default Risk: No asset backing—full loss possible if issuer fails.
Credit Risk: Dependent on company health.
Market Risk: Prices fluctuate with rates and sentiment.
Taxation:
Interest: Taxed at slab rates as interest income.
Capital Gains: STCG (<36 months) at slab rates; LTCG (>36 months) at 12.5%.
TDS: 10% if interest >₹5,000 p.a., avoidable with Form 15G/H.
How to Invest:
Public Issue: Subscribe during NCD offerings via ASBA (Application Supported by Blocked Amount).
Stock Exchanges: Trade via demat on NSE/BSE.
Tip: Look for AA or higher ratings for reasonable safety.
Example:
Tata Capital Unsecured NCD (Feb 2025): 9% p.a., 7-year tenure. ₹1 lakh earns ₹9,000 yearly (taxed). AA+ rated, reflects strong parent backing.
Note:
Suits risk-tolerant investors chasing yield.
Research issuer’s cash flow and debt levels.
3. Convertible Bonds
Convertible bonds allow investors to convert their bonds into equity shares after a specified period. These bonds provide the advantage of fixed interest along with the potential for capital appreciation if the company's stock performs well.
Features:
Tenure: 3-10 years, conversion window specified.
Interest Rate: Lower than NCDs (e.g., 6-8% p.a.).
Conversion: Into equity at a pre-set price/ratio.
Latest Change: SEBI eased conversion norms in 2024 for listed firms.
Benefits:
Dual Benefit: Interest income + equity upside.
Flexibility: Hold as debt or convert for growth.
Downside Protection: Bond value if stock underperforms.
Risks:
Equity Risk: Conversion value depends on stock price.
Lower Yield: Interest is less than pure debt options.
Liquidity: Limited secondary market activity.
Taxation:
Interest: Taxed at slab rates as interest income.
Conversion: No tax at conversion; equity sale taxed separately (LTCG >₹1.25 lakh at 12.5% after 12 months).
Capital Gains (Pre-Conversion Sale): STCG (<36 months) at slab rates; LTCG (>36 months) at 12.5%.
TDS: 10% on interest >₹5,000 p.a.
How to Invest:
Public Issue: Apply during issuance via banks/brokers.
Stock Exchanges: Buy listed bonds via demat.
Tip: Assess stock potential before committing.
Example:
Reliance Industries Convertible Debenture (2025 Issue): 7% p.a., convertible after 3 years at ₹3,000/share. ₹1 lakh earns ₹7,000 yearly (taxed), with equity option.
Note:
Perfect for bullish investors wanting a safety net.
Compare conversion price to current stock trends.
4. Non-Convertible Debentures (NCDs)
NCDs are corporate bonds that cannot be converted into equity shares. Since they lack the conversion feature, they offer higher interest rates compared to convertible bonds and fixed deposits.
Features:
Tenure: 1-10 years, often 3-7 years.
Interest Rate: Fixed, 8-10% p.a., paid monthly/quarterly/annually.
Minimum Investment: ₹10,000.
Latest Change: SEBI capped retail NCD issuances at ₹500 crore in 2025 to curb oversubscription.
Benefits:
High Returns: Outstrip FDs (e.g., 9% vs. 7%).
Flexibility: Multiple payout options.
Tradability: Listed on NSE/BSE.
Risks:
Default Risk: Tied to issuer’s financial health.
Interest Rate Risk: Value drops if rates rise.
Liquidity: Varies by issue size.
Taxation Benefits:
Interest: Taxed at slab rates as interest income.
Capital Gains: STCG (<36 months) at slab rates; LTCG (>36 months) at 12.5%.
TDS: 10% if interest >₹5,000 p.a., avoidable with Form 15G/H.
How to Invest:
Public Issue: Apply via ASBA during NCD launches.
Stock Exchanges: Trade via demat on NSE/BSE.
Tip: Opt for AAA/AA-rated NCDs for safety.
Example:
Shriram Transport Finance NCD (Jan 2025): 9.25% p.a., 5-year tenure. ₹1 lakh earns ₹9,250 yearly (taxed). AA+ rated, strong NBFC backing.
Note:
A go-to for yield seekers with moderate risk appetite.
Check credit ratings and exit options.
5. Perpetual Bonds
Perpetual bonds do not have a fixed maturity date, meaning investors receive indefinite interest payments. These bonds are often issued by banks and financial institutions to strengthen their capital base. They’re classified as Additional Tier 1 (AT1) capital under Basel III.
Features:
Tenure: No fixed maturity; callable after 5-10 years.
Interest Rate: High, e.g., 8-9% p.a., paid annually.
Minimum Investment: ₹1 lakh (targeted at HNIs).
Latest Change: Post-Yes Bank AT1 write-off (2020), SEBI capped retail exposure in 2024.
Benefits:
Lifetime Income: Interest forever if not called.
High Yields: Compensates for risk.
Diversification: Unique fixed-income asset.
Risks:
Call Risk: Issuer can redeem early, ending income.
Default Risk: Interest can be skipped in distress (non-cumulative).
Regulatory Risk: Write-off possible in bank failures (e.g., AT1 norms).
Taxation:
Interest: Taxed at slab rates as interest income.
Capital Gains: If traded, STCG (<36 months) at slab rates; LTCG (>36 months) at 12.5%.
TDS: 10% if interest >₹5,000 p.a.
How to Invest:
Public Issue: Limited offerings via banks (e.g., SBI, HDFC).
Stock Exchanges: Trade via demat on NSE/BSE.
Tip: Restricted to QIBs/HNIs; retail access via secondary market.
Example:
SBI Perpetual Bond (2025 Issue): 8.5% p.a., callable after 10 years. ₹1 lakh earns ₹8,500 yearly (taxed). AAA-rated, strong bank backing.
Note:
High-risk, high-reward—suits aggressive investors.
Understand call provisions and issuer stability.
Special Category Bonds
Special category bonds serve unique purposes, ranging from tax benefits to infrastructure funding. These bonds cater to specific investor needs while promoting economic and environmental initiatives.
1. Tax-Free Bonds
Tax-Free Bonds are debt instruments issued by government-backed entities like public sector undertakings (PSUs) to fund infrastructure projects such as highways, railways, or housing. The standout feature is that the interest income is fully exempt from income tax under Section 10(15) of the Income Tax Act, 1961.
Features:
Tenure: Long-term, typically 10-20 years.
Interest Rate: Fixed, ranging from 5.5% to 7.5% p.a., paid annually or semi-annually.
Minimum Investment: ₹1,000 or as per issue terms (e.g., ₹5,000 for some PSU bonds).
Latest Change: No new issuances since 2016; secondary market trading dominates in 2025.
Benefits:
Tax-Free Income: Interest is exempt, boosting post-tax returns for high earners (e.g., 7% tax-free beats 10% taxable for a 30% tax bracket investor).
Safety: Backed by government entities—negligible default risk.
Long-Term Stability: Fixed income for decades.
Risks:
Liquidity Risk: Long lock-in; secondary market sales depend on demand.
Interest Rate Risk: Prices fall if market rates rise.
No New Issues: Limited supply since 2016 reduces options.
Taxation:
Interest: Fully tax-exempt under Section 10(15).
Capital Gains: On sale before maturity:
STCG: <12 months (listed bonds), taxed at slab rates.
LTCG: >12 months, 10% without indexation (Finance Act 2024 removed 20% with indexation option).
No TDS on interest.
How to Invest:
Secondary Market: Buy listed bonds via NSE/BSE using a demat account and broker (e.g., Zerodha, ICICI Direct).
Primary Issue: No new issues in 2025; historical applications were via banks/PSUs during subscription windows.
Tip: Check bond yields and ratings (e.g., AAA by CRISIL) on platforms like BondsIndia.
Example:
NHAI Tax-Free Bond (2015 Issue): 7.39% p.a., matures 2031. ₹1 lakh earns ₹7,390 yearly (tax-free). Trading at ₹1,05,000 in March 2025, yielding ~6.8%.
Note:
Best for HNIs and retirees in high tax brackets seeking safe, tax-efficient income.
Monitor yield-to-maturity (YTM) in secondary market purchases.
2. Masala Bonds
Masala bonds are rupee-denominated bonds issued overseas by Indian companies to raise foreign capital without currency exchange risk. They help companies attract international investors while ensuring returns in Indian currency.
Features:
Tenure: 3-10 years, often 5-7 years.
Interest Rate: Fixed, typically 7-9% p.a.
Minimum Investment: Varies, often ₹1 lakh for secondary market retail access.
Latest Change: RBI eased ECB (External Commercial Borrowing) norms in 2024, boosting Masala Bond issuances.
Benefits:
Currency Stability: Rupee returns—no forex risk for Indian investors.
Higher Yields: Competitive rates vs. domestic bonds.
Global Exposure: Diversifies portfolio with international flavor.
Risks:
Issuer Risk: Depends on company health, not government-backed.
Liquidity Risk: Thin trading in India’s secondary market.
Regulatory Risk: Changes in ECB rules could impact issuance.
Taxation:
Interest: Taxed at slab rates as interest income for Indian residents.
Capital Gains: STCG (<36 months) at slab rates; LTCG (>36 months) at 12.5% without indexation.
TDS: 10% if interest >₹5,000 p.a., avoidable with Form 15G/H.
How to Invest:
Secondary Market: Trade via NSE IFSC (GIFT City) or domestic exchanges if listed, using a demat account.
Primary Issue: Institutional access during issuance; retail via brokers if offered.
Tip: Check issuer’s credit rating (e.g., AA by ICRA).
Example:
HDFC Masala Bond (2024 Issue): 8% p.a., 5-year tenure, listed on LSE. ₹1 lakh earns ₹8,000 yearly (taxed). Trading at par in March 2025.
Note:
Suits investors comfortable with corporate risk and seeking rupee-based global bonds.
Watch RBI’s forex policy for issuance trends.
3. Green Bonds
Green bonds finance environmentally sustainable projects like renewable energy and sustainable infrastructure. These bonds attract investors who prioritize eco-friendly initiatives.
Features:
Tenure: 5-15 years, often 7-10 years.
Interest Rate: Fixed, 7-8% p.a., paid semi-annually/annually.
Minimum Investment: ₹10,000 or as per issue.
Latest Change: SEBI’s 2025 Green Debt Securities framework mandates 100% fund allocation to green projects.
Benefits:
Eco-Impact: Supports sustainability goals.
Competitive Returns: Comparable to regular corporate bonds.
Safety: Often issued by reputed entities (e.g., PSU banks).
Risks:
Issuer Risk: Default risk tied to company finances.
Liquidity Risk: Limited secondary market depth.
Greenwashing: Funds may not fully align with eco-goals (verify use of proceeds).
Taxation:
Interest: Taxed at slab rates as interest income.
Capital Gains: STCG (<36 months) at slab rates; LTCG (>36 months) at 12.5%.
TDS: 10% if interest >₹5,000 p.a., avoidable with Form 15G/H.
No special tax exemptions.
How to Invest:
Public Issue: Apply via ASBA during offerings (e.g., through banks like SBI).
Stock Exchanges: Trade via NSE/BSE using a demat account.
Tip: Review green certification (e.g., Climate Bonds Initiative).
Example:
Yes Bank Green Bond (2024 Issue): 7.5% p.a., 10-year tenure, funds solar projects. ₹1 lakh earns ₹7,500 yearly (taxed). AAA-rated, trading at ₹1,02,000 in March 2025.
Note:
Ideal for environmentally conscious investors with moderate risk tolerance.
Check project transparency in offer documents.
4. Municipal Bonds
Municipal bonds are issued by local municipal corporations to fund infrastructure projects such as roads, water supply, and sanitation. These bonds are useful in improving urban infrastructure while providing investment opportunities.
Features:
Tenure: 5-15 years, typically 10 years.
Interest Rate: Fixed, 7-8% p.a., paid annually.
Minimum Investment: ₹10,000 or as specified.
Latest Change: SEBI’s 2025 push for urban infra funding increased issuances.
Benefits:
Civic Impact: Funds local development.
Decent Returns: Higher than G-Secs, lower risk than corporates.
Safety: Quasi-government backing reduces default risk.
Risks:
Municipal Risk: Default possible if local finances falter (rare with central support).
Liquidity Risk: Thin secondary market.
Interest Rate Risk: Prices dip if rates rise.
Taxation:
Interest: Taxed at slab rates as interest income (unless explicitly tax-free, which is rare).
Capital Gains: STCG (<36 months) at slab rates; LTCG (>36 months) at 12.5%.
TDS: 10% if interest >₹5,000 p.a.
How to Invest:
Public Issue: Apply via banks/brokers during issuance.
Stock Exchanges: Trade via NSE/BSE with a demat account.
Tip: Assess issuing municipality’s revenue (e.g., property tax base).
Example:
Pune Municipal Corporation Bond (2024 Issue): 7.5% p.a., 10-year tenure. ₹1 lakh earns ₹7,500 yearly (taxed). Trading at ₹1,01,000 in March 2025.
Note:
Good for civic-minded investors with moderate risk appetite.
Verify issuer’s fiscal health (e.g., via annual reports).
5. Zero-Coupon Bonds
Zero-coupon bonds are issued at a discount and redeemed at face value without periodic interest payments. These bonds offer gains through price appreciation over time.
Features:
Tenure: 5-20 years, often 10-15 years.
Interest: Implicit (difference between issue price and face value).
Minimum Investment: ₹10,000 or as per issue.
Latest Change: RBI’s 2025 STRIPS (Separate Trading of Registered Interest and Principal Securities) revival boosts zero-coupon options.
Benefits:
Predictable Growth: Known maturity value (e.g., ₹1 lakh grows to ₹2 lakh).
No Reinvestment Risk: No interest to reinvest.
Capital Appreciation: Suits long-term goals.
Risks:
Liquidity Risk: Hard to sell before maturity.
Interest Rate Risk: Prices sensitive to rate changes.
Tax Complexity: Imputed interest may be taxed annually (check with issuer).
Taxation:
Interest: No periodic interest; gain at maturity taxed as interest income at slab rates (if unlisted) or LTCG at 12.5% (>36 months, if listed).
Capital Gains: STCG (<36 months) at slab rates; LTCG (>36 months) at 12.5% for listed bonds.
No TDS typically.
How to Invest:
Public Issue: Apply via banks/PSUs during offerings.
Secondary Market: Trade via NSE/BSE if listed, using demat.
Tip: Calculate YTM to assess real returns.
Example:
PFC Zero-Coupon Bond (2024 Issue): Issued at ₹60,000, matures 2034 at ₹1 lakh. Implicit yield ~5.2%. Gain of ₹40,000 taxed at maturity.
Note:
Best for patient investors with lump-sum goals (e.g., education, retirement).
Confirm tax treatment (listed vs. unlisted) with issuer.
Alternative Fixed-Income Investments
When it comes to wealth preservation and steady income generation, fixed-income investments play a crucial role in an investor's portfolio. While bonds are a popular choice, there are several other fixed-income investment options in India that offer competitive returns, safety, and tax benefits. In this article, we explore some of the best fixed-income alternatives available in India.
1. Fixed Deposits (FDs)
Fixed deposits (FDs) are one of the most preferred fixed-income instruments among Indian investors due to their guaranteed returns and flexible tenures. Offered by banks and non-banking financial companies (NBFCs), FDs provide a safe and predictable return on investment.
Features:
Tenure: Ranges from 7 days to 10 years.
Interest Rate: Fixed, typically 6-8% p.a. for banks, 7-9% for NBFCs (as of 2025).
Minimum Investment: ₹1,000 (banks); ₹10,000 (some NBFCs).
Latest Change: RBI’s 2025 guidelines allow premature withdrawal penalties to be waived for senior citizens in emergencies.
Benefits:
Guaranteed Returns: Principal and interest are assured (up to ₹5 lakh insured by DICGC for banks).
Flexibility: Options for monthly, quarterly, or cumulative interest payouts.
Safety: Bank FDs are among the safest options.
Risks:
Inflation Risk: Returns may not beat inflation (e.g., 7% vs. 5% CPI).
Liquidity Risk: Premature withdrawal incurs penalties (e.g., 1% rate cut).
NBFC Risk: Higher returns come with default risk (not DICGC-insured).
Taxation Benefits:
Interest: Taxed as interest income at slab rates (e.g., 30% + cess for high earners).
TDS: 10% if interest >₹40,000 p.a. (₹50,000 for seniors); avoidable with Form 15G/H.
Section 80C: 5-year tax-saver FDs qualify for ₹1.5 lakh deduction.
How to Invest:
Banks: Visit a branch, use net banking, or mobile apps (e.g., SBI, HDFC).
NBFCs: Apply online via platforms like Bajaj Finance or through agents.
Tip: Compare rates on aggregator sites like BankBazaar.
Example:
SBI Fixed Deposit (March 2025): 7% p.a. for 5 years. ₹1 lakh grows to ₹1.40 lakh (₹40,000 interest taxed at slab).
Note:
Best for risk-averse investors or emergency funds.
Opt for AAA-rated NBFCs if chasing higher yields.
2. Debt Mutual Funds
Debt mutual funds invest in a mix of fixed-income securities, such as government bonds, corporate bonds, treasury bills, and money market instruments. These funds are ideal for investors seeking better returns than FDs but with relatively lower risk compared to equities.
Features:
Tenure: Varies (e.g., liquid funds: days; long-duration: years).
Returns: 6-9% p.a. (depends on fund type and rates).
Minimum Investment: ₹100-₹1,000 (varies by fund).
Latest Change: Finance Act 2024 aligned debt fund taxation with FDs, removing indexation.
Benefits:
Diversification: Exposure to multiple securities reduces risk.
Liquidity: Redeemable anytime (open-ended funds).
Variety: Options like liquid, corporate bond, or gilt funds.
Risks:
Interest Rate Risk: NAV falls if rates rise.
Credit Risk: Defaults by underlying issuers (mitigated by high-rated funds).
Market Risk: Volatility affects returns.
Taxation:
Gains: Taxed as STCG (slab rates, <36 months) or LTCG (12.5%, >36 months).
No TDS: Tax paid at redemption, not deducted upfront.
How to Invest:
Direct: Via AMC websites (e.g., HDFC Mutual Fund) or apps.
Platforms: Use Groww, Zerodha Coin, or MF Central.
Tip: Choose funds with >80% AAA-rated holdings for safety.
Example:
HDFC Corporate Bond Fund (March 2025): 7.5% annualized return. ₹1 lakh grows to ₹1.07 lakh in 1 year, taxed on ₹7,500 gain.
Note:
Ideal for investors seeking moderate risk with liquidity.
Match fund duration to your investment horizon.
3. Public Provident Fund (PPF)
PPF is a long-term government-backed savings scheme that offers tax-free returns and is an excellent option for risk-averse investors.
Features:
Tenure: 15 years (extendable in 5-year blocks).
Interest Rate: 7.1% p.a. (Q1 2025, reviewed quarterly).
Investment Limits: ₹500 min, ₹1.5 lakh max p.a.
Latest Change: Partial withdrawals now allowed after 5 years (up to 50% of balance).
Benefits:
Tax-Free: Interest and maturity amount fully exempt (EEE status).
Safety: Sovereign guarantee.
Compounding: Long tenure boosts returns.
Risks:
Lock-In: 15-year commitment limits liquidity.
Rate Fluctuation: Quarterly revisions may lower returns.
Inflation Risk: Fixed rate may lag inflation.
Taxation Benefits:
Interest & Maturity: Fully tax-exempt.
Section 80C: Investment up to ₹1.5 lakh deductible.
How to Invest:
Post Office: Open an account with KYC and initial deposit.
Banks: Via SBI, ICICI, or online banking.
Tip: Automate annual deposits for discipline.
Example:
PPF (2025): ₹1.5 lakh p.a. at 7.1% grows to ₹40.68 lakh in 15 years, all tax-free.
Note:
Perfect for tax-saving and long-term goals.
Use as a core fixed-income asset.
4. Employees' Provident Fund (EPF)
EPF is a retirement savings scheme available to salaried employees, managed by the Employees’ Provident Fund Organisation (EPFO).
Features:
Contribution: 12% of basic salary (employee + employer).
Interest Rate: 8.15% p.a. (FY 2024-25, announced annually).
Withdrawal: After 5 years for tax-free status; partial withdrawals allowed.
Latest Change: Interest on contributions above ₹2.5 lakh p.a. taxable since 2021.
Benefits:
High Returns: Outpaces most fixed-income options.
Tax Benefits: EEE status if withdrawn after 5 years.
Forced Savings: Ensures retirement corpus.
Risks:
Liquidity: Locked until retirement or job switch (with conditions).
Rate Risk: Annual rate revisions.
Taxable Excess: High earners face tax on excess interest.
Taxation:
Interest: Tax-free up to ₹2.5 lakh contribution; excess at slab rates.
Maturity: Tax-free after 5 years continuous service.
Section 80C: Employee contribution deductible up to ₹1.5 lakh.
How to Invest:
Automatic: Via employer payroll deduction.
Voluntary PF (VPF): Increase contribution via HR.
Check Balance: Use EPFO portal or UMANG app.
Example:
EPF (2025): ₹10,000 monthly contribution (₹1.2 lakh p.a.) at 8.15% grows to ₹28 lakh in 15 years, tax-free if conditions met.
Note:
A must for salaried workers; maximize VPF for higher returns.
Monitor contribution caps to optimize tax benefits.
5. National Savings Certificate (NSC)
NSC is a government-backed savings instrument designed to encourage small savings with fixed returns and tax benefits.
Features:
Tenure: 5 years.
Interest Rate: 7.7% p.a. (Q1 2025, compounded annually).
Investment Limits: ₹1,000 min, no max.
Latest Change: Digital NSC available via e-post office portal in 2025.
Benefits:
Safety: Sovereign guarantee.
Tax Saving: Qualifies for Section 80C.
Compounding: Interest reinvested boosts maturity value.
Risks:
Liquidity: Locked for 5 years; no premature withdrawal.
Inflation Risk: Fixed rate may not keep pace.
Taxable Interest: Reduces net returns.
Taxation Benefits:
Interest: Taxed at slab rates (reinvested, taxable in final year).
Section 80C: Investment up to ₹1.5 lakh deductible.
How to Invest:
Post Office: Submit KYC and cash/cheque.
Online: Via India Post’s e-banking portal.
Tip: Buy multiple certificates for staggered maturity.
Example:
NSC (2025): ₹1 lakh at 7.7% grows to ₹1.45 lakh in 5 years; ₹45,000 interest taxed in year 5.
Note:
Great for small savers with tax goals.
Pair with liquid options for flexibility.
6. Kisan Vikas Patra (KVP)
KVP is a post office savings scheme that doubles your investment in a fixed period, originally for farmers but now open to all.
Features:
Tenure: 115 months (9 years 7 months, as of 2025).
Interest Rate: 7.5% p.a. (implicit, doubles principal).
Investment Limits: ₹1,000 min, no max.
Latest Change: Premature withdrawal after 2.5 years allowed with penalty.
Benefits:
Guaranteed Doubling: Simple, predictable growth.
Safety: Government-backed.
No Cap: Invest any amount.
Risks:
Long Lock-In: 9+ years ties up funds.
Taxable Returns: No exemptions reduce net gain.
Inflation Risk: Fixed return may lag.
Taxation:
Interest: Taxed at slab rates at maturity (implicit in doubled amount).
No Deductions: No Section 80C benefit.
How to Invest:
Post Office: Submit KYC and payment.
Banks: Select branches (e.g., SBI) offer KVP.
Tip: Use for lump-sum goals like a child’s education.
Example:
KVP (2025): ₹1 lakh doubles to ₹2 lakh in 115 months; ₹1 lakh gain taxed at slab rates.
Note:
Suits patient investors with no tax-saving needs.
Compare with FDs for shorter-term options.
7. Senior Citizens Savings Scheme (SCSS)
SCSS is a government-backed scheme for individuals aged 60+ (or 55+ with VRS), offering high interest and regular income.
Features:
Tenure: 5 years (extendable by 3 years).
Interest Rate: 8.2% p.a. (Q1 2025, paid quarterly).
Investment Limits: ₹1,000 min, ₹30 lakh max.
Latest Change: 2025 budget raised max limit from ₹15 lakh to ₹30 lakh.
Benefits:
High Returns: Among the best for fixed income.
Regular Income: Quarterly payouts suit retirees.
Safety: Sovereign guarantee.
Risks:
Liquidity: Locked for 5 years (1% penalty for early exit after 1 year).
Taxable Interest: Reduces net returns for high earners.
Age Restriction: Limited to seniors.
Taxation:
Interest: Taxed at slab rates.
TDS: 10% if interest >₹50,000 p.a., avoidable with Form 15H.
Section 80C: Investment up to ₹1.5 lakh deductible.
How to Invest:
Post Office: Submit KYC, age proof, and deposit.
Banks: Via SBI, ICICI, etc., or online banking.
Tip: Open multiple accounts up to ₹30 lakh limit.
Example:
SCSS (2025): ₹1 lakh at 8.2% pays ₹2,050 quarterly (₹8,200 p.a.), taxed at slab.
Note:
A retiree’s dream for safe, high-yield income.
Pair with PPF for tax-free diversification.
Final Thoughts
India’s bond and fixed-income market offers a diverse range of options catering to different risk appetites. Whether you are looking for capital preservation, steady income, tax savings, or diversification, there is a suitable option for you. Understanding these instruments will help you make informed investment decisions based on your financial goals and risk tolerance.
For more insights on wealth management and investment strategies, stay tuned to Finomic Insights!
Comments