Government Securities (G-Secs) Compare

Additional Useful Information

• When an investor purchases a bond, the issuing entity is bound by a legal contract wherein they are obligated to make interest payments as per the coupon rate to the investor.

• The prices of G-Secs keep changing with a changing economic environment and government policies.

• Investing in G-Secs is suitable for investors who desire regular passive income with safety of capital being the priority.

Returns *

• G-Secs do not guarentee any returns. However, the probability of negative returns are relatively low.

• Typically, G-Secs can guarantee returns ranging from 6.5% to 7.5% per year depending on the duration for which they are held and the government policies.

• G-Secs usually provide higher returns as compared to bank fixed deposits.

Risk Level

• G-Secs are considered very low risk investments.

• G-Secs have a credit risk associated with them. This means that if the company issuing these bonds default in their commitments, the investor can make losses on the investment. Since the institution issuing these bonds is the Government of India, the credit risk is negligible.

• G-Secs become riskier during times of economic downturn. This is because the chance of the issuing institution defaulting on the interest payments are higher in these times. However, in times of downturn, these government bonds are amongst the safest bonds available in the market.

• Based on the credit risk, all bonds are provided with a credit rating by a credit rating agency. This helps in determining how safe or risky the bonds are. Investors should analyse this rating to understand the risk more accurately.

Liquidity

• G-Secs are liquid.

• They can be sold at any given time prior to maturity. However, it is possible that there may not be a buyer for the bond. There is no guarantee that the bond will be sold.  In this event, the investor continues to hold the bonds till maturity and earn the interest till maturity.

Interesting Facts

• G-Secs are given a sovereign guarantee, which means investors will 100% get their invested amount back and that the government will never default.

• An auction is conducted every week by the GOI to issue new G-Secs. This way, investors always have the option to wait until the auction to purchase G-Secs or can go out in the secondary market and purchase them. In the secondary markets, prices of G-Secs fluctuate due to interest rate changes.

Tax Implications

• Earnings received from G-Secs are taxable.

• Interest earned by investors from G-Secs are to be added to their total taxable income and taxes are required to be paid as per the income tax slab.

• When investors sell G-Secs prior to maturity, the difference between the Sale Amount and Purchase Amount is typically called “Capital Gain” or “Capital Loss” (if sale amount is lesser than the purchase amount).
• Situation 1 – If the G-Secs are sold within a period of 2 years from investment, the Capital Gains earned (called Short Term Capital Gains) are to be added to the taxable income of the investor and taxes are required to be paid based on the applicable income slab.
• Situation 2 - If the G-Secs are sold after a period of 2 years from investment, the Capital Gains earned (called Long Term Capital Gains) are taxed at 12.5% on the gains.

• There is no tax in case of “Capital Loss”.

Where To Invest

• https://coin.zerodha.com/gsec

• https://www.hdfcsec.com/g-sec-bonds