What are Bonds?
Bonds is an investment instrument in which the investor lends money to a bond issuer (government or company) and in return the issuer pays interest regularly (called coupons) as well as principal amount on maturity.
You can see the below image to understand this better.
The interest paid by the Issuer to the holder is paid on semi-annual, annual or monthly basis. Bonds are considered less risky investments.
Types of Bonds
1. Capital Gain Bonds
Let’s say you sold your land and earned some profit. Now generally you will have to pay tax to the government on this profit. To avoid paying these taxes the government has made a rule that either you reinvest your profits into another property or invest in Capital Gain Bonds.
The most significant advantage of investing in such a bond is that it offers you tax exemption from Capital Gains Tax under Section 54EC of the Income Tax Act, 1961, for up to 6 months from the sale of the asset sold. This means that you will have to invest your money within 6 months of selling your property.
Capital Gain Bonds are issued by the following:
- NHAI (National Highway Authority of India)
- RECL (Rural Electrification Corporation Ltd)
2. Government Securities
These are the bonds issues by center and state government. These have zero risk involved as it is issued by government. These pay interest semi-annually. But their interest rate is pretty low – even lower than FDs generally.
3. Corporate Bonds
These are issued by corporations for their financial needs. They carry some risk. These bonds pay higher interest compared to FDs and government securities.
4. Inflation Bonds
These are generally used to beat the inflation. These bonds are issued by the RBI.
5. Convertible Bonds
This is a hybrid instrument of investment in which the holder can convert some fixed amount of bond value into equity shares of that company. These bonds have potential to pay more as it is linked to equity also. These have risk less than stocks but more than other bonds.
6. Sovereign Gold Bond
These bonds are issued by the government of india and involve zero risk. SGBs are a superior option to invest in gold without having to worry about its storage cost, making charges in the case of gold jewelry. SGB comes with an advantage due to tax benefits and regular interest payout for the investors.
7. RBI Bonds
The Government of India decided to issue 7.75% Taxable Bonds, 2018, with effect from January 10, 2018, for enabling resident citizens/HUF to invest in a taxable bond, without any monetary ceiling.
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