In this article, we are going to explain how a retail investor can invest in Government Securities (Bonds/T-Bills/G Sec) with Zerodha. What is Government Securities and what is the advantage of investment with Bonds/T-Bills compare to Bank FDs.
For retail, investors buying Government Securities (Bonds/T-Bills) was not an easy process, they need to connect with a Bank or large financial institutes to buy GS. That was a bit challenging where Banks are more interested to push investor towards their FDs. Recently Zerodha providing an easy and hassle-free environment to start investing in Bonds/ T-Bill via its most popular mutual fund investment app - Zerodha Coin. Now it's easy for all retail investors to invest in Bonds/T-bills using Zerodha Coin mobile app. You need to transfer funds into 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 payments will be credited to your bank account. Yes, it's that easy and convenient to grow your money with risk-free and stable investment option online.
Government Securities are mainly divided in 2 categories -
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 loan 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 were issued to banks and/or large financial institutes with a minimum investment amount of Rs 5 Cr. In April 2018, RBI approved NSE to start taking this to retail investors. 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 an 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 at discount price, you will get a refund of difference in your bank account. Once bonds are listed, you can trade them in secondary market in case you want to exit.
Treasury Bills (T-Bills) are for less than one year period – 91 days, 182 days and 364 days. T-bills do not contain interest component. T-bills are issued at a discount price to their true (Par) value and upon expiry, it redeemed at par. For example, if the true value is Rs 100, the 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 at Rs 98 and after 91 days you will get Rs100 for sure.
When you apply the T-bills, it comes in your demat account and after 91 days (maturity) it automatically get debited from your Demat Account and the par value gets paid to the bank account linked to your DEMAT account. This process is called "Extinguishment of Securities".
Government Bonds are for long period and you get Interest paid twice a year. Symbol of each bond is unique and will give you clear details about the bond.
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 it's clear that Gov Bonds are for more than 1 year with a fixed interest rate. Interest get credited every 6 months in your bank account linked to your demat account. On maturity - principal is paid back to your bank account in full.
Bonds are issued on discounted price, Premium Price or Actual Price which is called Auction Price.
Let's understand it with an example:
700GS2021 (7% Interest of GS on 2021(3 year)) is issued on discounted price of 98 and assume you invested 200 of these bonds. So you paid 200*98=19600
|Time Period||Interest||Cash Flow||Comments|
|0-6 Months||3.50%||3.5%*100*200=700||Half yearly Interest|
|6-12 Months||3.50%||3.5%*100*200=700||Half yearly Interest|
|1 to 1.5 Year||3.50%||3.5%*100*200=700||Half yearly Interest|
|1.5 to 2 Year||3.50%||3.5%*100*200=700||Half yearly Interest|
|2 to2.5 year||3.50%||3.5%*100*200=700||Half yearly Interest|
|2.5 to 3 year||3.50%||3.5%*100*200=700||Half yearly Interest|
|At maturity 3rd year||Principal Repayment||200*100=20000||Additional 400 Rs for|
Discounted Bond 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.
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 a longer run. For example, in 923GS2043 – This was issued in 2013 with an interest rate of 9.23% for 30 years, so for 30 years you will get 9.23% interest, where the current market price of interest on bond or T-bills is between 7 to 7.50%.
Safe Investment/Sovereign Guarantee: Bonds/T-bills are issued by RBI and backed by the Government of India, so they are a 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 a regular interval as dividend and comes under other income in your IT returns, so no TDS.
Collateral to avail loan: Bonds can be used as collateral to avail loan.
Can sell at Secondary Market: You can sell / trade bonds in the secondary market.
Numbers in this table are for 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. The rate of interest has kept changing depending on various market / economy conditions.
|Days||FD (Yield)||G Sec (Yield)|
With Zerodha Coin retail investors can bid for T-bills between Monday and Tuesday, Bonds between Tuesday and Thursday. Min bid that 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 oversubscribed and you will not get an allotment, you can try in the next cycle.
Zerodha will charge 0.06% or Rs 6 for Rs 10,000 investment as brokerage.
T-Bills: T-Bills are for less than one year and part of buy in discount and sell at a premium, so you need to pay short-term capital gain (STCG) on this as per applicable slab rate.
Bonds: Interest income credited to your bank account every 6 months, so it is considered as income from other source so tax need to pay as per your tax slab.
In case of any appreciation in the bond price, it is considered a 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 year then it's STCG.
Last updated on 19th May 2019