What Are Government Bonds ? Famous Govt. Bonds And Their Tax Saving Schemes

Government bonds

Government bonds are one of the safest modes of investment. They provide higher returns than bank savings accounts and also render tax benefits to the user. The tax schemes are divided into two categories when dealing with government bonds. They are Tax free schemes and tax saver schemes. Government bonds are well known for their low risk profile but the only reason people don’t opt for them is their longer time frame.There are bonds which are available in low duration as well but rather than investing in them people prefer investing into equities and mutual funds. The reason is they provide higher returns than the government. Also they are more risky than government bonds but their returns satisfy the investors’ urge for profits.

All the government bonds are included under the government securities category, they are having a time frame from 5 years to 40 years. Hence they are having a fixed long time frame for investments.

There are some government bonds which are issued by the state government and these bins are termed as State Development loans or SDLs.

Understanding the Tax Benefit schemes of Government bonds

Government bonds as mentioned above provide two types of tax benefit schemes. They are :

  • Tax free schemes
  • Tax saver scheme

The major difference between both of them is that the tax free scheme has no tax levied on investment amount or the maturity amount. Hence the amount invested when withdrawn does it involve any tax applied on it. However the interest recurring every year is taxable.

The Tax saver bonds have no interest applied on the invested amount , but the tax is applied on the maturity amount of the bonds. This means that tax is applied on such bonds in high numbers but on the other hand the tax applied is deductible under exemptions provided by section 80CCF.

Hence the amount of investments are taxable under three stages :

  • Investment stage
  • Maturity stage
  • Interest stage

The tax saving schemes are differentiated on the basis of the tax applied at every stage.

Types of government bonds in India


Lets understand some of the most famous binds offered by the government:

Sovereign Gold Bonds

They came into effect in 2015 and are a smart way of investing into gold. The ornaments and bars of gold come at a price hike of 30% and 15% respectively because of the labor charges or duty charges. They also have some transactional costs associated with them. However in case of Sovereign gold bonds the interest rate applied is 2.5% and the costs of acquiring is also very less. Also they can be used as collateral for obtaining the loans.

7.75% Goi Savings Bonds

Such bonds have a face value of 1000 Rs and are available with a maturity date of 8 years. They are a replacement for the old 8% savings bonds offered by the government, The investors still prefer these bonds. The reason is that they are having exemption under the tax act of 1957 and are safe. Also they offer a higher interest than FDs.

Capital Gains bonds by NHAI and REC

They are known for their tax saving facility on sale of long term assets. The Long term capital assets are taxable when sold and if the individuals diverts his earnings to NHAI and REC bonds then he or she gets a tax exemption from the amount of investments. This scheme is applicable within 6 months of investment under the 54E section.

The face value for this bond is set at Rs. 10000 and the maximum investment amount is limited upto 50 Lakh Rs. They are high rated bonds with AAA ratings and are stable modes of investments.

IRFC Tax Free Bonds

These bonds are tax free hence there is no tax applicable on maturity amount or investment amount. However the interest earned is taxable. IRFC bonds come under two time frame categories. One is for 10 years and the other one is for 15 years. They are offered in form of Non redeemable secured debentures and are offered upto 8% interest.

These bonds are subscribed through government portal or NSE GoBid application. The person needs to register himself by his DEMAT account information and depository details. After that he or she can apply for such bonds online through application or portal.

Advantages of Investing into Government Bonds

Government bonds have a list of advantages associated with them. They are :

  • The bonds are highly stable and safe. They are the safest mode of investment into capital markets with better returns available then FDs and savings accounts. They are under the debt obligation of the government. This means that governments level to pay the investors back for the bonds issued and there are very rare chances that government fails in doing the same
  • The returns available to the bondholders already come post adjustment of inflation rate. This means that bonds associated with the inflation adjusted category have the tendency to change the bond price with the routine average market price. The gains are still there but the amount invested is adjusted in comparison to the bond rates.
  • They provide a regular income for the bond holders, the reason is that RBI has given strict orders for disbursement if gains every six months. This generates a stable income flow and makes it a regular income providing source.
Disadvantages of Investing into Government Bonds
  • There are various bonds which provide low interest rates but are more stable than other bonds. One of them is 7.75% GOI bonds. Such bonds provide low income in comparison to the bank rates. Although the rates are higher than FD but yet they are more risky than FD and have a low interest rate in comparison to the returns of other bonds available.
  • The government bonds with high returns have a longer time cycle levied in them. Hence the maturity of most of the high return bonds is within the time frame of 10 t0 30 years.

Who Should Opt for Government Bonds and Why ?

Big pocketed investors and corporate banks should invest into such binds, The reason should not be getting returns but to balance their overall portfolio. This means that the investors have equities and debentures in their portfolio, The proportion of equity is higher as they invest into multiple tracks and try to balance their stock market portfolio. Hence to negotiate the risk present in quotes the portfolios should be filled with such bonds. This not only gives stability to the portfolio but also rides extra space for more risk driven investment in the portfolio.

The investors should be capable of bearing the high time frame associated with such bonds. The high return bonds have a longer time frame and hence the investors have to forget about the money prenet in such bonds if they want to earn significant returns from the investment. Also the money invested should not be diverted within the time frame or before maturity date. If such a scenario occurs all the returns would be cashed out and investors cannot get desired returns and tax benefits as well.

Also beginners should opt for such binds as this would provide them with stable income flow and they can explore their risk options into equity markets.


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