Invest in Government Securities-Bonds or T-bills with Zerodha Coin

Posted on 22nd Oct 2018
by Team TopShareBrokers

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Invest in Government Securities-Bonds or T-bills with Zerodha Coin

In this article we are going to explain how retail invester can invest in Government Securities (Bonds/T-Bills/G Sec) with Zerodha? What is Government Securities and what are the advantage of investment with Bonds/T-Bills compare to Bank FDs.

What is Government Securities and how retail investor can invest in G-Sec?

    Government Securities are mainly divided in 2 categories –

    1. Long Dated Bonds (Bonds)
    2. Treasury Bills (T-Bills)

What are Government Securities?

    Let’s discuss in detail about Bonds and T-Bills-

    When Government of India needs money, they go to RBI for borrowing money. The RBI, auction the loan in the form of Bonds/T-Bills. In such case you are lending a part of overall load the government is seeking. Against the loan, RBI will pay you periodic interest and also repay the principal at the end of the tenure. G-Bonds/T-Bills come under low risk and low return investment.

    In past G-Bonds/T-bills was issued by banks and/or large financial institutes with minimum investment amount of Rs 5 Cr, in April 2018, RBI approved NSE to start taking this to retail investor. With this Retail Investors can invest in G-Bonds/T-Bills with Minimum of Rs 10,000 Investment and Max of Rs 2 Cr.

    Bonds and T-Bills are similar to IPO, you can place a bid, once auction process is done, you will get the bonds in your demat account. In case bonds are issued in discount price, you will get refund of difference in your bank account. Once bound are listed, you can trade them in secondary market in case you want to exit.

What are T-Bills?

    Treasury Bills (T-Bills) are for less than one year period – 91 days, 182 days and 364 days. T-bills are issued before interest component. In simple words, if the true value is Rs 100, this t-bill is issued for Rs 98 for 91 days. After 91 days you will get Rs 100. Its like you are buying a stock @98 and after 91 days you will get @100 for sure.

    When you apply the T-bills its come into demat format and after 91 days (maturity) its automatically paid back in your bank account as per demat account. This process is called “Extinguishment of Securities”.

What are Bonds?

    Government Bonds are for Long Period and Interest paid are twice a year. Symbol of each bond is unique and will give you clear details about what this bond is for example:

    727GS2024A – Means 7.27% Interest, GS: Government Securities and 2024: Maturity Year (6 Year from 2018), A: is internal for NSE use (Fresh Issue)

    So its clear that Gov Bonds are for more than 1 year with fixed interest rate, Interest are paid every 6 months in your bank account linked with your demat account. On maturity – principal are paid back to your bank account in full.

    Bonds are issued on Discounted price, Premium price or Actual Price – Which is called auction price.

    How you can calculate your returns on bounds – Lets take an example:

    700GS2021 (7% Interest of GS on 2021(3 year)) is issued on discounted price of 98, assume you are investing 200 of these bonds: So you paid 200*98 = 19600

    Angel Broking with closest competitors
    Time PeriodInterestCash FlowComments
    0-6 Months3.50%3.5%*100*200=700Half yearly Interest
    6-12 Months3.50%3.5%*100*200=700Half yearly Interest
    1 to 1.5 Year3.50%3.5%*100*200=700Half yearly Interest
    1.5 to 2 Year3.50%3.5%*100*200=700Half yearly Interest
    2 to2.5 year3.50%3.5%*100*200=700Half yearly Interest
    2.5 to 3 year3.50%3.5%*100*200=700Half yearly Interest
    At maturity 3rd yearPrincipal Repayment200*100=20000Additional 400 Rs for
     Discounted bound price

    So with the investment of Rs 19600 you will get = 700 + 700 + 700 +700 + 700 + 700 +20000 =24200 Rs which is 7.14% of total investment for 3 year.

What are the advantages of Bonds/T-bills?

    Lock in Interest Rate – This is really a big advantage we have seen in past bonds, if you have invested in long term bonds 20 Year or 35 Years, you are locking your interest for longer run. For example in 923GS2043 – This was issued in 2013 with interest rate of 9.23% for 30 years, so for 30 years you will get 9.23% interest, where current market price of interest on bond or T-bills are between 7 to 7.50%.

    Safe Investment/Sovereign Guarantee: Bonds/T-bills are issued by RBI and backed by Government of India, so they are safe investment (Sovereign Guarantee). Where FD’s are issued by banks and not considered 100% safe. Return of Interest and principal is guaranteed.

    No TDS: Interest payment is done on your bank account on regular interval as dividend and comes under other income in your IT returns, so no TDS deducted.

    Collateral to avail loan:  Bonds you can place collateral to avail loan.

    Can sell in Secondary Market: You can sell/trade bonds in secondary market.

Comparison of T-Bills/Bonds earning with FD

    Numbers on this table are from Average interest paid by major PSU banks and current rate of interest by RBI G-Sec as of Oct 2018. Please validate number again before investing. Rate of interest is keep changing depend on various market/economy conditions.

    Angel Broking with closest competitors
    DaysFD (Yield)G Sec (Yield)
    91 Days6.256.93
    184 Days6.357.29
    364 Days6.707.58
    1 Year6.426.45
    2 Years6.476.8
    3 Years6.537.05
    5 Years6.47.33
    10 Years6.857.92

How can retail Investor invest in Bonds/T-bills with Zerodha Coin?

    With Zerodha Coin retail investors can bid for t-bills between Monday and Tuesday, Bonds between Tuesday and Thursday. Min Bid can be placed is Rs 10,000 and the maximum is Rs 2 Cr. If bids are accepted, the securities will be credited in your demat in two days. In case it over subscribed, and you will not get allotment, you can try in next cycle.

    Invest in Government Securities by Zerodha Coin

How much brokerage I need to Pay with Bonds/T-bills Investment with Zerodha?

    Zerodha will charge .06% or Rs 6 for Rs 10,000 investment will be charged as brokerage.

Taxation with Bonds/T-bills

    T-Bills: T-Bills are for less than one year and part of buy in discount and sell in premium, so you need to pay short-term capital gain (STCG) on this as per applicable slab rate.

    Bonds: Interest income credited in your bank account every 6 months, so it is considered as from other income, tax need to pay as per your tax slab.

     In case of any appreciation in the bond price, it is considered capital gain. Long-term  (LTCG) is 10% flat or 20% with indexation. If G-Sec are held for more than 3 years it’s come under LTCG, if less than 3 years then it’s STCG.

Final Thought about Investment in Government Securities by Zerodha

    For retail investors buying Government Securities (Bonds/T-Bills) was not an easy process, they need to connect with Bank or large financial institutes to buy GS. That was bit challenging where Banks are more interested to push investor towards their FDs. Recently Zerodha providing an easy and hassle-free environment to start investment in Bonds/ T-Bill via its most popular mutual fund investment app –Zerodha Coin. Now its easy for all retail investor to invest in Bonds/T-bills using zerodha coin mobile app. You need to transfer funds in your trading account, choose T-Bill (Monday and Tuesday) or Bonds (Tuesday to Thursday), apply online. G-secs will be credited to your demat upon successful allotment and all interest payment will be credited to your bank account. Yes, it’s easy and convenient to grow your money with risk-free and stable investment option online.

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  2018-10-22T02:22:33+00:00

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