What are Government Securities?

Indian government securities or G-Secs, are debt securities issued by the Central or State governments. When you buy Indian government bonds, you are a creditor who is lending money to the government. Indian government entities sell Government Securities to fund their operations and build new infrastructure projects.

Types of Government Securities

In India, Government securities can be either issued for a period lesser than one year or greater than one year.

• Treasury Bills are money market instruments issued for maturity period of less than a year. Short-term Government Securities with a maturity of less than one year are referred to as treasury bills, or T-bills. These are issued for three different maturities – 91 days, 182 days and 364 days. These are issued at discount to face value and are highly liquid.
• Government Securities with a maturity of one year or more are long-term securities, referred to as government bonds. These often have long term maturities ranging from 5 years to 40 years

The Indian government issues both Treasury Bills and long term government bonds, whereas state governments can issue bonds which are known as State Development Loans (SDLs).

Popular Government Securities:

• Fixed Rate Bonds
• Floating Rate Bonds
• Sovereign Gold Bonds (SGB)
• Inflation Indexed Bonds

Fixed Rate Bonds

These bonds offer fixed rate of interest which does not change throughout the maturity irrespective of fluctuations in the market interest rates.

Floating Rate Bonds

These bonds do not have a fixed coupon rate. Often the coupon rate available on the bond is linked to a benchmark based on a fixed spread. Once the benchmark’s rate of interest is reset, coupon rate on Floating Rate Bond will also change.

Sovereign Gold Bond (SGB)

SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold. Investors have to pay the issue price in cash and the bonds will be redeemed in cash on maturity. The Bond is issued by Reserve Bank on behalf of Government of India.

• Gold Linked Returns: Markey value of SGB’s s are linked to the gold’s prices. These bonds are denominated in terms of one gram of gold.
• Flexibility: Investors have the flexibility to choose to invest in quantities convenient to them. Minimum investment quantity is 1 gram. Maximum permissible quantity for individual investors is 4kg, 20kg for trusts and other organisations. When invested digitally, investors also get a discount Rs. 50 per gram of purchase.
• Guaranteed Interest Income: Investors can earn RBI declared rates of 2.5% on your investment annually.
• Convenience: Sovereign Gold Bonds provide you with seamless investment opportunity in gold without being worried about holding physical gold. Investors can hold SGB’s in demat account, so no fear of theft or quality related concerns.
• Liquidity and Early Exit: Investors can exit their holdings prior or opt to exit the scheme at the end of the 5th, 6th or 7th year of investment. In this case the amount realized will happen at the prevailing gold prices at the time of redemption.
• Exempt from Capital Gains Tax on Maturity: If remain invested for the full tenure of 8 years, bond holders also get exemption from Capital Gain Tax.

Inflation Indexed Bonds

These are securities designed to help protect investors from inflation. Primarily issued by Government, Inflation Indexed Bonds are indexed to inflation so that the principal and interest payments rise and fall with the rate of inflation. Inflation can significantly erode investors purchasing power, and these bonds can potentially provide protection from inflation’s effects. Inflation Indexed Bonds may also offer additional benefits in a broader portfolio context.

Participation in Government Securities

Generally, buyers of Government Securities include:

• Banks
• Primary Dealers,
• Financial Institutions,
• Mutual Funds and
• Insurance Companies

Retail investors can also participate in government bond auctions via non-competitive bidding up to 5% of the specified amount the government seeks for the Government Securities issuance. This means if the amount the government has notified for an amount of INR 2,000 crore, the amount reserved for non-competitive bidders or retail investors would be INR 100 crore and the remaining INR 1900 crore will be put up for the competitive auctions for non-retail participants.

Retail investors can seamlessly invest in Government Securities through ICICIdirect trading account.

Government Securities Auctions

The government auctions Treasury Bills and government bonds. It announces auction dates and bond sales ahead of time, and discloses the amount of securities it intends to sell.

Two auction processes are employed:

Yield-Based Auctions: For issuance of new Government Securities, and

Price-Based Auctions: For reissuance of the securities issued earlier by the Government.

An investor who purchases a bond can expect to receive a return from either:

• The coupon interest payments made by the issuer.
• Any capital gain (or capital loss) when the bond is sold/matured.
• Income from reinvestment of the interest payments that are interest-on-interest.

Why to Invest in Government Bonds?

• Sovereign Guarantee:Government Securities carry with them an assurance of the stability of investments and promised returns. Perceived credit risk is almost negligible and hence these bods command a huge demand in the market.
• Regular Income: Accrued interest on Government Bonds are disbursed every six months and hence provides an opportunity to earn regular income.
• Inflation Linked Returns:Inflation Indexed Bonds and Floating Rate Savings Bonds help earn returns that are linked to inflation thereby protecting real purchasing power of money.

Taxation on Government Securities

Interest income from Government Securities is taxable based on the holder’s income tax bracket under the Income Tax Act. Gains from the sale of bonds are taxed as either long-term capital gains or short-term capital gains, depending on how long the bonds were held.

The inflationary rise can be estimated by the inflation index published by the IT department and is based on the:

• Year of acquisition/improvement of the asset
• Year of transfer of the asset
• Cost inflation index of the year of acquisition/improvement of the asset

How to Invest in Government Securities through ICICIdirect.com?

Investors can easily invest in various Government of India Securities through ‘icicidirect.com trading portal’ by visiting FD/ Bonds Section.

Steps to apply online:

• Login to ICICIdirect.com
• Go to FD/ Bonds – Government Securities and click on “Apply”
• Enter details and click on “Proceed”
• “Agree” to Terms & Conditions
• Get Order Confirmation