Government Securities

20.1 A New Chapter in Retail Investing: Access to Government Securities

Varun: Isha, I heard retail investors can now buy government bonds directly. Is that true?

Isha: Yes, Varun. NSE and RBI have opened up access to G-Secs and T-Bills for individual investors. It’s a big shift.

Varun: That’s great. So I can invest in sovereign-backed instruments through my trading account?

Isha: Exactly. Just like stocks or mutual funds. It’s ideal for conservative investors looking for stable returns and low risk.

Varun: Sounds perfect for long-term planning.

Isha: Absolutely. Let’s walk through how it works.

In a landmark move, the National Stock Exchange (NSE), in collaboration with the Reserve Bank of India (RBI), has opened the doors for retail investors to directly invest in Government Securities (G-Secs)—including long-term bonds and Treasury Bills (T-Bills).

Until recently, these instruments were largely reserved for banks, insurance companies, and institutional investors. But now, individual investors can participate in this segment and benefit from stable, sovereign-backed returns. This marks a significant shift in India’s financial landscape, offering retail participants access to one of the safest and most reliable asset classes.

Why This Matters

Government securities offer guaranteed returns, low default risk, and predictable cash flows—making them ideal for conservative investors, retirement planning, and portfolio diversification. With the new framework, you can now buy G-Secs through your trading account, just like equities or mutual funds.

Getting Started: What You Need to Know

Since this is a relatively new opportunity for retail investors, it’s important to understand the structure, benefits, and mechanics of investing in G-Secs. To help you navigate this space, we’ve compiled a set of easy-to-follow FAQs and examples that explain:

• How to invest in T-Bills and long-term bonds
• What returns to expect
• How maturity and interest payments work
• Where to track your holdings
• Tax implications and liquidity options

This initiative is part of a broader effort to democratize access to fixed-income products and deepen India’s bond market. Whether you’re a seasoned investor or just starting out, this is a great time to explore how government securities can fit into your financial strategy.

20.2 –Government Securities (G-Secs): FAQs for Retail Investors

Varun: Isha, what’s the difference between T-Bills and Bonds?

Isha: T-Bills are short-term—91, 182, or 364 days. They’re issued at a discount and redeemed at face value. Bonds are long-term—5 to 40 years—and pay interest every six months.

Varun: So T-Bills don’t pay interest?

Isha: Not directly. You earn the difference between purchase price and face value. Bonds, on the other hand, give regular income.

Varun: And I can sell them before maturity?

Isha: Yes, once listed, they’re tradable on the secondary market. You can track auctions like IPOs and invest with as little as ₹10,000.

What am I investing in?

You’re investing in debt instruments issued by the Government of India—either Treasury Bills (T-Bills) or Bonds. These are backed by the sovereign guarantee of the Indian government, making them virtually risk-free.

What are T-Bills and Bonds?

Just like individuals borrow from banks, the government borrows from the public via the Reserve Bank of India (RBI). RBI conducts auctions where investors can lend money to the government by purchasing T-Bills or Bonds.

• T-Bills: Short-term instruments with maturities of 91, 182, or 364 days. They don’t pay interest but are issued at a discount and redeemed at face value.
• Bonds:Long-term instruments with maturities ranging from 5 to 40 years. They pay interest twice a year and return the principal at maturity.

T-Bills Example

Suppose you buy a 91-day T-Bill with a face value of ₹100 at ₹97. After 91 days, you receive ₹100. Your profit is ₹3.

To calculate the annualized yield:

This means your effective annual return is 12.40%, though you only held the instrument for 91 days.

Upon maturity, the T-Bill is extinguished from your DEMAT account, and the face value is credited to your bank account.

Bonds Example

Bonds differ from T-Bills in two key ways:

1. They have longer maturities.
2. They pay semi-annual interest.

Example: 740GS2035A

• 40% annual interest
• GS = Government Security
• 2035 = Maturity year
• A = Fresh issue

You’ll receive 3.7% interest every six months until 2035. At maturity, you’ll get back the principal.

More examples:

Bond Investment Illustration

Suppose you buy 150 units of 700GS2020 at ₹98.40:

• Investment = ₹14,760
• Interest every 6 months = ₹525
• Total interest over 2 years = ₹2,100
• Principal at maturity = ₹15,000

Total return = ₹17,100 Effective yield ≈ 7.88%

What is Yield to Maturity (YTM)?

YTM assumes you reinvest each interest payment at the same rate. It reflects the true annualized return and is used by institutional investors to compare bonds.

How is interest paid?

Interest is credited directly to your bank account linked to your DEMAT, just like dividends from stocks.

How does the auction process work?

Retail investors can now participate with a minimum of ₹10,000. Banks and institutions place bids on RBI’s auction platform, and RBI determines the weighted average price. You initially pay the “amount payable,” and any difference from the final price is refunded the next day.

Can I sell my bond before maturity?

Yes. Once listed, bonds can be traded on the secondary market, just like stocks.

How do I track upcoming auctions?

Think of it like applying for an IPO. You bid during the auction, and once allotted, the bond gets listed. You can trade or hold it till maturity.

• Minimum investment: ₹10,000 and multiples
• Maximum investment: ₹2 crore

19.3 Understanding State Development Loans (SDLs)

Varun: Isha, I came across something called SDLs. Are they different from central government bonds?

Isha: SDLs are issued by state governments. They work like G-Secs—semi-annual interest, principal at maturity—but they’re backed by the issuing state.

Varun: Are they safe?

Isha: Very. RBI assigns zero risk weight to SDLs. Banks don’t need to hold capital against them, and they’re eligible for SLR and repo operations.

Varun: Do they offer better yields?

Isha: Often, yes. States may offer slightly higher interest to attract investors. You can bid in RBI auctions and track them via the auction calendar.

What Are SDLs?

State Development Loans (SDLs) are debt instruments issued by individual State Governments to meet their budgetary needs. Much like the Central Government’s dated securities, SDLs are backed by the full faith and credit of the issuing state, and they offer semi-annual interest payments with principal repayment at maturity.

These securities are considered safe and stable, and they’re now accessible to retail investors through RBI’s auction mechanism.

Key Features of SDLs

• Interest Payments:Paid twice a year, based on the coupon rate.
• Maturity: Varies by issue—can range from 2 to 30 years.
• SLR Eligibility: SDLs qualify for the Statutory Liquidity Ratio, making them attractive to banks.
• Collateral Use: Eligible as collateral for borrowing under:

• Market repo
• Liquidity Adjustment Facility (LAF)
• Special repo operations via CCIL

For more details, you can refer to RBI’s FAQs on SDLs.

How SDLs Are Issued and Traded

SDLs are issued via fortnightly auctions conducted by RBI and traded electronically on the NDS-OM platform (Negotiated Dealing System – Order Matching). Each SDL has a unique symbol that reveals key details.

Example: Decoding 05.75APSDL2024

• Coupon Rate: 5.75% annually
• Issuer: Andhra Pradesh (AP)
• Type: SDL
• Maturity: 2024

If you invest in this bond, you’ll receive 2.875% interest every six months until maturity in 2024. At the end of the term, your principal is returned.

Risk Profile of SDLs

SDLs carry an explicit sovereign guarantee, meaning the issuing state is legally obligated to repay. According to RBI’s Capital to Risk-weighted Assets Ratio (CRAR) norms:

• SDLs have zero risk weight.
• Banks are not required to hold capital against SDL investments.

This makes SDLs as safe as Central Government securities, and in some cases, even more attractive due to better yields.

Tax Implications

• Interest Income: Taxed as income from other sources, based on your income tax slab.
• Capital Gains:

• Long-Term Capital Gains (LTCG): Taxed at 10% without indexation or 20% with indexation if held for more than 3 years.
• Short-Term Capital Gains (STCG): Taxed as per your slab rate if held for less than 3 years.

For T-Bills, the gain from buying at a discount and redeeming at par is treated as STCG.

Allotment Process

SDLs are issued in limited quantities, and allotment is not guaranteed. If demand exceeds supply, some bids may not be accepted. However, RBI conducts multiple auctions each month, so investors can reapply in the next round. To track upcoming SDL auctions, visit the RBI Auction Calendar.

19.4 Key Takeaways

• Retail investors can now directly invest in G-Secs and T-Bills, thanks to NSE and RBI’s initiative.
• T-Bills are short-term instruments, issued at a discount and redeemed at face value.
• Government Bonds are long-term, offering semi-annual interest and principal repayment at maturity.
• Investments start from ₹10,000, making them accessible to small investors.
• Interest is credited directly to your bank account, just like dividends.
• G-Secs can be traded on the secondary market, offering liquidity before maturity.
• Yield to Maturity (YTM) reflects true annualized returns, assuming reinvestment of interest.
• State Development Loans (SDLs) are issued by state governments, offering similar safety and better yields.
• SDLs carry zero risk weight under RBI norms, making them attractive to banks and retail investors.
• Taxation applies to interest and capital gains, with different rules for short-term and long-term holdings.

19.5 Fun Activity: “Yield Detective”

You buy a 91-day T-Bill with a face value of ₹100 at ₹97.50.

Questions:

1. What is your profit at maturity?
2. What is the annualized yield?

Answers:

1. Profit = ₹100 − ₹97.50 = ₹2.50
2. Yield = (2.5 ÷ 97.5) × (365 ÷ 91) ≈ 10.27%

This shows how short-term instruments generate returns through discounting.