Government or non-government, a bond is a debt instrument which the authorizer issues to the general public and owes the debtholders a principle amount. A certain interest amount (coupon) is payable by him to use and/or to repay the principal at a later date, named maturity. A bond is just as contractual as a share paper and the borrowed sum needs to be repaid at borrowed money with interest at fixed intervals like semiannually, annually or even monthly. Government bonds are the best long term investments from external sources. In case of government bonds, it helps to finance on going expenditure. Government issued securities are mostly “tax free.”
Shares and bonds are both securities with some differences that shareholders have an ownership (equity partnership) in the company whereas the bondholders are the lenders (creditorship stake) in the company. One more difference to be noted is that bonds have a predetermined term but stocks can be incessantly outstanding. Bonds come towards closure and redeemed.
There are many tax free government and private bonds running in the market. Every debt form provides information about the interest rate, last exchange price etc.
The money received from these bonds are tax free and does not form part of your total taxable income under section 10 (15) (iv) (h) of I.T. Act, 1961. These debt bonds are issued by Government backed entities and have less default risk.
Some general features are as under:
- Government bonds can be issues in physical or dematerialized form
- Bonds are issued with tenure ranging between 1-20 years. Once applied, they can be easily tracked in the secondary market provided it’s issued in a demat mode.
- There is no capping on the investment made in these government bonds.
- To be eligible for higher interest rates, the maximum investment is around 10 lakhs. The rest depends on the individual, HUF to be eligible for higher rates
- The offered interest rate is subjected to the regulations by CBDT but in tandem with the government debt of similar maturity
- No additional tax benefits are attached here
In today’s times, risk taking is the essential most. A little risk is significant for equivalent for greater returns. It is important to strike a balance between taking risks
& inviting regular income. Mutual funds and fixed deposits are safe and provides competitive pricing in the terms of regular income.
A closer look at government bonds will be worthwhile. This is as appealing as the other equity bonds and securities. Not only businesses and industries but even individuals and small investors can invest in government securities. The purpose of investment must be very clear to the investing person, short term or long term. It is primarily important to have an electronic account called demat to invest firstly.
Demat accounts are basically used for buying and selling in shares, stocks & mutual funds. Any dealing needs to be channelized through demat accounts. Government bonds are largely available with all the leading banks and post offices. For any possible investment, one needs to visit the local branch of the chosen bank with the requisite documents to fill up the application.
Processing an application takes a stipulated time period. Once that’s done, a bond certificate is issued in the same name. Now let’s take a look at the process of the registration process:
As discussed before, small investors and individuals can make an investment according to the regulations laid down by RBI. RBI recently introduced a scheme known as a Negotiated dealing system, order matching platform. Government bonds can only be held in subsidiary general ledger (SGL) accounts. All banks and primary participants are the existing members of the above mentioned scheme, and hence can fully participate in the government bonds dealings.
Once the banks or primary participants execute the booked order, the government will clear the order and will convert the SGL to the demat form. Finally, transfers the funds to the demat account maintained. One significant benefit of Government bonds would be that it’s quite secure as an investment for the unemployed aged. As it is the tenure lasts between 10-20 years and the interest stays high compared to most debt securities.
In a dynamic market of shares and bonds, people are eyeing for easy and high return investments. So before shelling out money, research thoroughly about government securities.