Bonds

What are bonds?

Bonds are fixed income instruments which pay fixed rate of interest at regular intervals and the principal amount on maturity. Bonds as an asset class are very popular in the developed economies. However, the bond market in India has historically been relatively small. In more recent times, with Bank FD interest rates declining, bonds are gaining a lot of popularity among retail and HNI investors.

How do bonds work?

You can buy bonds both from the primary market (at the time when the bond is issued) or from the secondary market (stock exchanges). You need to have Demat accounts to invest in bonds in secondary market. If you buy in the primary issue, you will get the bond at face value. In the secondary market, the bonds will be priced either at premium or discount to the face value based on prevailing interest rates. The bond will make periodic interest payments to you based on the coupon rate. On maturity you will get the face value of the bond. You can also sell the bond before maturity in the secondary market at prevailing market price.

Capital gain bonds

Capital gain bonds are financial instruments issued by certain government entities to provide tax-saving opportunities to investors. These bonds offer tax exemptions on long-term capital gains from selling assets like real estate, provided the gains are invested in these specified bonds. The lock-in period for such investments is usually ten years or more.

You can save capital gains tax arising out sale of capital assets e.g. property etc by investing in capital gains bonds u/s 54EC. Long-term capital gain is the gain that is derived out of a sale of an asset (Land or Building) that has been held for more than 2 years. You can invest the gain in certain specified bonds to claim tax exemption within 6 months of the date of sale of the asset. 54EC bonds, or capital gains bonds, are one of the best way to save long-term capital gain tax arising out of sale a capital asset.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) , NHAI (National Highways Authority of India) and IRFC (Indian Railways Finance Corporation Limited). The tenure of these Bonds are usually 5 years.

Corporate Bonds

Corporate bonds are debt securities issued by companies to raise funds. When investors purchase these bonds, they are lending money to the corporation in exchange for periodic interest payments and the repayment of the principal at maturity. Corporate bonds usually offer higher returns compared to government bonds because they carry a higher level of risk.

NCDs (Non-Convertible Debentures)

Non Convertible Debentures are long term investment opportunities issued by companies to raise funds. The NCDs have no collateral and hence heavily dependent on the creditworthiness of the company. The credit scores of the company issuing the NCD should be considered before investing in such instruments. Even the NCDs are rated by the rating agencies. NCDs carry a fixed rate of interest and a fixed maturity period. The money is raised through a public issue. Subsequently, they are traded over the counter or on the exchange. Investors in NCDs should do a thorough check on the company that is issuing the debentures with a view to the reason that the funds are being raised. NCDs issued by high rated companies are generally safe and offer certain other benefits like tax exemptions at source and high liquidity as they are tradable on the stock exchange before they reach maturity.