Bonds
Understanding Bonds
Bonds are the instruments to raise funds by the Government and Corporate entities from the public. It is considered as a loan from the subscribers. It carries a fixed rate of interest and is called a Fixed income instrument.
It usually carries a maturity period of 7-10 years. But infrastructure bonds are issued for longer periods up to 30 years. Bonds are considered less risky than Equities or Shares as a return in the form of interest is assured. Whereas in the case of Equities, return is in the form of dividends. Companies declare dividends out of the profits earned.
Who Can Issue the Bonds?
Bonds are issued by the following entities:
Corporate Bonds
Debentures
Corporate issues the bonds to raise the funds to conduct their business activities. They may need funds for long term basis for their Capital expenditures or short term basis for working capital requirements. Bonds issued by corporate also called Debentures.
Types of Corporate Bonds:
- Convertible Debentures These type of bonds are converted into shares as per the pre-decided terms and conditions of the debentures. It could be fully convertible or partly convertible debentures. In the case of fully convertible bonds, no amount is payable on maturity. In the case of Partially convertible bonds, the amount about the nonconvertible part is repaid on maturity. Corporate bonds carry a certain amount of risk as the repayment of bonds depends upon the profit earned by the company. Therefore companies offer more interest on their bonds.
- Non-convertible Debenture Nonconvertible debentures remain as a debt instrument and carries the fixed rate of interest. Redemption amount is repaid on maturity.
Government Bonds
G-Sec / Sovereign Guaranteed
The government also issues the bonds to fund their various developmental activities mostly for infrastructure projects. Government bonds are also known as G-Sec or Government Securities. These bonds are considered a safe investment as repayment is guaranteed by the government. These bonds carry little less interest compared to Corporate bonds. The duration of the bonds is also longer for up to 30 years. The interest rate offered on Government bonds is also called Coupan rate.
Types of Government Bonds:
Sovereign Gold Bonds (SGB)
These types of bonds are issued by the Central Government. The underlying security in these bonds is Gold. The price of the bond is fixed based on the prevailing price of the gold. The value of a bond is mentioned in no. of grams of gold.
On maturity, investors can opt to get either the physical gold in grams or equivalent amount of value in rupees. The interest payable in these bonds is @2.50% pa. Interest can be taken half-yearly or can be taken at the time of maturity. The interest paid on these bonds is tax-free.
54EC Bonds (Capital Gains)
54EC bonds, or capital gains bonds, are one of the best ways to save long-term capital gain tax. 54EC bonds are specifically meant for investors earning long-term capital gains and would like tax exemption on these gains. Tax deduction is available under section 54EC of the Income Tax Act.
54EC bonds do not allow any tax exemption on short-term capital gains tax. The maximum limit for investing in 54EC bonds is Rs. 50,00,000. The eligible bonds under Section 54EC are REC (Rural Electrification Corporation Ltd), PFC (Power Finance Corporation Ltd) and IRFC (Indian Railways Finance Corporation Limited).