Types of Bonds in India: Features, Risks & How to Choose

Bonds are fixed-income debt instruments in which you lend money to a corporation or the government in return for regular interest payments and your principal at maturity.

As an investor, you'll find various types of bonds in India. You can choose from Government Securities (G-Secs), corporate bonds, PSU bonds, municipal bonds and specialised instruments such as 54EC bonds. Tax treatment varies by the specific bond and applicable tax rules.

Other options include various grades of corporate bonds. Each category has its own mix of risks, returns, and lock-in periods. Classifications also depend on the issuer, interest, taxation, and other special features.

For investors today, it is more about understanding how factors like inflation, credit ratings, and interest rate cycles may affect the investment. This is where choosing the right bond requires balancing your financial goals with your risk appetite. Learn more about bond types and which ones you should choose below. 

Key Takeaways

• Bonds in India are mainly issued by the Government (G-Secs, Treasury Bills) and corporations (Corporate Bonds). The former have negligible default risk, while the latter offer higher interest rates to compensate for higher risk. 
• There are also interest-based bonds, i.e. fixed-rate, floating-rate or zero-coupon bonds. 
• Other types include convertible, callable, puttable, perpetual, inflation-linked, and taxation-structure-related options (tax-free and capital gains bonds). 
• Choosing a bond depends on your risk appetite and investment horizon. 

How Bonds Are Classified: Types at a Glance

Understanding how bonds are classified is very important. While we cover it in more detail below, here is a basic table to give you a clearer picture. Bonds in the country are primarily classified by issuer, special features or structure, and interest-rate structure. 

Government securities (G-Secs and Treasury Bills) carry virtually zero default risk. They are easily accessible via platforms like RBI (Reserve Bank of India) Retail Direct, while PSU and corporate bonds offer higher yields than Government bonds. However, returns depend on credit ratings, and they may carry higher risks.

Investments like 54EC Capital Gains Bonds may also help investors save on long-term capital gains tax under specific sections of the Income Tax Act. That is why making a wise choice matters, depending on your long-term goals and risk tolerance. 

Types of Bonds Based on Issuer

As we have already seen, bonds in India are classified by issuer. Let us take a closer look at them below: 

Government Bonds (G-Secs, SDLs and T-Bills)

Government bonds are the highest credit-security tier in the country. They carry negligible or virtually zero default risk, since they are backed by the Government's sovereign guarantee. This classification has three major sub-categories -

• Dated Government Securities (G-Secs): 

• Meaning: Long-term debt instruments issued exclusively by the Government to fund public infrastructure. 
• Issuer and Tenure: The Central Government of India issues them, with long-term maturities ranging from 5 to 40 years. 
• Interest: They have fixed or floating coupon (interest) rates that are paid on the face value. It is usually distributed on a half-yearly or semi-annual basis. 
• Risks: These bonds are considered to have the highest levels of safety and virtually zero risk of default (sovereign risk). This is because they are backed by the Government of India. 
• Types: This category includes floating-rate bonds, fixed-rate bonds, zero-coupon bonds, and inflation-indexed bonds. 

• State Development Loans (SDLs): 

• Meaning: SDLs are dated market-borrowing securities. They are issued by individual State Governments in the country to finance various developmental initiatives and budgetary needs. 
• Issuer: The issuers are the respective State Governments, i.e., the Governments of Tamil Nadu, Maharashtra, and other states. 
• Tenure: The tenure is usually medium to long-term, often matching durations of up to 10 years or more. 
• Interest: These bonds pay fixed coupon rates semi-annually. The principal is repaid at maturity. SDLs generally trade at a yield spread over comparable Central Government securities, with the spread varying by state, maturity and market conditions.
• Risks: They generally carry very low credit risk, although they carry a small margin of operational risk compared with the Central Government. 

• Treasury Bills (T-Bills): 

• Meaning: T-Bills are short-term money market instruments. The Central Government issues them to meet temporary mismatches in cash flows. 
• Issuer: The Centre issues the bonds through the RBI. 
• Tenure: The tenure is short-term, with maturity of less than one year. They are often available in three variants: 91 days, 182 days, and 364 days. 
• Interest: These bonds do not pay any regular interest or coupon. Instead, T-Bills are zero-coupon securities issued at a discount to their face value. They are redeemed at maturity at full face value. The return is the difference between the discounted purchase price and the redemption par value. 
• Risks: T-Bills have very high safety and liquidity, making them well-suited for institutions and banks to park short-term surplus funds. 

So, G-Secs fund central infrastructure projects, while SDLs are issued by state governments to meet budgetary needs. T-Bills are different because they are short-term instruments issued only by the Centre, with distinct maturities.

The RBI primarily manages these instruments, which carry near-zero risk and serve as benchmarks for risk-free returns in the Indian financial market. 

Indian investors can access them through platforms like the RBI Retail Direct portal, and they are also highly liquid.

At the same time, they also serve as a crucial low-risk anchor for banks, institutional portfolios, and conservative retail investors looking to preserve capital. 

Sovereign Gold Bonds (SGB) and RBI Floating Rate Savings Bonds

SGBs and RBI Floating Rate Savings Bonds are highly specialised retail-centric debt instruments. The Government of India mostly issues them, and they offer unique risk-reward profiles. Let us learn more about them below: 

• Sovereign Gold Bonds (SGBs): 

• Meaning: SGBs (sovereign gold bonds) are specialised Government securities that are denominated in grams of gold. The RBI discontinued them for fresh subscriptions in February 2024 after the last tranche was issued. They were paperless, secure substitutes for holding physical gold, letting investors benefit from gold price appreciation without purity or storage worries. 
• Issuer & Risk: The RBI issued them on behalf of the Central Government. They came with a sovereign guarantee, meaning there is zero risk of default. 
• Capital Appreciation: Their value was linked to the market price of 999-purity gold, so returns mirrored gold price movements. 
• Fixed Payouts: Investors got an additional 2.5% fixed interest (per annum) on the initial investment amount. This was paid semi-annually. 
• Tenure and Liquidity: The overall maturity period for SGBs stood at eight years. The RBI offered an official exit option after the 5th year on interest payment dates. Investors could also hold them in a demat account and trade them on the stock exchange for early liquidity. However, secondary market trading would sometimes see lower liquidity. 
• Investment Thresholds: The minimum investment was 1 gram in this case, with the maximum limit being 4 kg per financial year for HUFs (Hindu Undivided Families) or Individuals. The limit was 20 kg for trusts. 
• Taxation Aspects: For SGBs covered by the exemption, capital gains on redemption at maturity were exempt where the investor subscribed at the original issue and held the bond continuously until maturity. Interest remains taxable.

If sold early on the secondary market, gains would be taxed based on the holding period. The 2.5% annual interest was fully taxable as per your income tax slab. However, no TDS (tax deducted at source) was deducted in this case. 

• Collateral Needs: SGBs could be used as collateral to secure loans from financial institutions or banks. 

• RBI Floating Rate Savings Bonds (FRSB): 

• Meaning: RBI Floating Rate Savings Bonds (FRSB) are non-tradable debt instruments. They are primarily for conservative retail investors who want to preserve capital and earn steady, periodic income without worrying about stock market volatility. 
• Issuer & Risk Levels: The Government of India issues them through the RBI, with the highest level of safety (sovereign guarantee). 
• Return & Framework: These bonds differ from fixed deposits; they have floating or dynamic interest rates, reset every 6 months (January 1 and July 1 each year). The rate is strictly tied to the NSC (National Savings Certificate) Interest rate with a fixed 0.35% premium spread over it. Interest is paid semi-annually, with no growth or cumulative option. 
• Tenure: The bond comes with a strict lock-in period of 7 years. 
• Liquidity Levels: Regular investors cannot exit early or trade on a secondary market. The only exception is premature withdrawal, allowed solely for senior citizens (those aged 60 and above). This is available only after a minimum lock-in period of 4-6 years (depending on the specific age brackets) and is subject to a 50% penalty on the final coupon payment. 
• Investment Thresholds: The minimum investment starts at as little as ₹1,000, with no upper threshold/limit on the amount to be invested. 
• Taxation: The interest you earn is fully taxable at your regular income tax slab rate. Interest is taxable, and TDS may apply under prevailing income-tax rules.
• Collateral: You cannot trade, transfer, or pledge these bonds as collateral to get loans from financial institutions. 

Here is a quick round-up to illustrate the differences between these two types: 

Both instruments offer sovereign safety and zero risk of default, although they are relatively illiquid by nature until maturity. This makes them ideal for long-term retail investors looking for inflation protection and higher safety. 

Corporate Bonds and Non-Convertible Debentures (NCDs)

Let's look at these two instruments in this category. 

• Corporate Bonds: 

• Meaning: Corporate bonds are debt securities issued by private or public companies to raise capital. Companies raise these funds for diverse reasons, from working capital and refinancing to projects and business expansion. 
• Security: They can be unsecured or secured by specific assets of companies/issuers or collateral. This makes them rank higher as senior debt during any possible liquidation. 
• Issuers: These bonds are issued by leading corporations, PSUs (public sector undertakings) and other financial institutions. 
• Risk & Returns: These bonds usually carry lower risk than unsecured debentures. They mostly offer moderate interest rates. 

• Non-Convertible Debentures (NCDs): 

• Meaning: NCDs (non-convertible debentures) are a type of debenture that cannot be converted into stocks or equity shares. 
• Core Aspects: NCDs mainly function as fixed-return promissory notes. Since they do not offer an option to convert debt into company ownership, they compensate investors with higher interest rates. 
• Secured NCDs: These types of NCDs are supported by a charge on the issuer’s assets. In case the company fails to pay, the assets may be sold to recover investor funds. 
• Unsecured NCDs: Backed solely by the company's credit reputation, they carry higher risk and, in turn, offer higher yields. 
• Regulatory Aspects: The Securities and Exchange Board of India (SEBI) heavily regulates NCDs, and they are often listed on stock exchanges like the BSE and NSE for liquidity. 

Here is a quick round-up of their differences: 

Credit rating agencies like ICRA, CRISIL, and CARE also evaluate corporate bonds. High-quality bonds usually have AAA or AA ratings, indicating lower default risk, while lower-rated bonds offer higher yields to offset higher risk.

NCDs are commonly listed on stock exchanges for secondary market liquidity, while they also offer flexible annual, monthly, quarterly or cumulative interest payouts. 

PSU Bonds

Public Sector Undertaking (PSU) bonds are specialised debt instruments that are issued by Government-owned corporations and financial institutions. In this case, the Central or State Government will hold a majority stake of more than 51%. Some of their key aspects include: 

• Issuer Profile: They are mainly issued by top public sector enterprises, including reputed names like PFC, REC, IRFC, NTPC, NHAI and others. 
• Purpose: These entities issue the bonds mainly to fund operations, infrastructure, and business expansion. 
• Tenure: Most maturities are medium to long term, ranging from 5 to 10 years. 
• Interest Payout: Periodic interest (coupon) is paid annually or semi-annually, with principal repayment at maturity. 
• Credit Rating: Many PSU issuers have relatively strong credit profiles, but investors should examine the specific issuer, credit rating and whether the particular bond carries an explicit government guarantee. 
• Tradability: They are mostly listed on leading stock exchanges like the BSE (Bombay Stock Exchange) and NSE (National Stock Exchange). This lets investors buy and sell them through a demat account before maturity. 
• Types: This category includes fixed-rate, floating-rate, and tax-free bonds, along with capital gains or infrastructure bonds. 

PSU bonds may sometimes offer higher yields than regular bank FDs, with lower default risk and the ability to trade in the secondary market. Yet, fixed-rate bond prices may fall if broader economic interest rates rise during the tenure. Unlike G-Secs, PSU bonds may have minor default and credit risk if the company faces any financial distress. 

You can subscribe to these bonds directly during new public bond offers announced by leading PSUs.

You may also buy in the secondary market (listed bonds) through brokers or online bond platforms. You can also invest indirectly through debt mutual funds with portfolios more concentrated in PSU debt.

Tax-free PSU bonds are especially attractive to those in higher income tax brackets. Conservative investors who find Government bond yields quite low, while wanting to avoid credit risks of private corporate debt, may consider PSU bonds. 

Municipal Bonds

Municipal bonds are often called Muni bonds; they are debt securities issued by urban local bodies, Government agencies, and municipal corporations.

These bonds fund diverse civic infrastructure projects, with the capital raised put into public welfare initiatives such as roads, water supply systems, sewage networks, and urban transport routes.

Municipal bonds have a long history worldwide, and the Indian market has gained significant momentum recently, backed by regulatory support from the Ministry of Housing and Urban Affairs and SEBI. Here are some of their key aspects: 

• Lending Funds: Investors purchase these bonds through demat and trading accounts. This means effectively lending money to the Government or city authorities. 
• Interest and Repayment: The municipality pays interest (coupons) regularly, usually annually or semi-annually. The principal amount is also repaid upon maturity. 
• Tenure: The maturity periods usually range from 3 to 10 years. 
• Returns: Investors typically receive moderate fixed returns, depending on the specific issuer and market conditions. 
• General Obligation Bonds: They are supported by the municipality's general revenues and financial strength, including property and property taxes. 
• Revenue Bonds: They are repaid from the cash flows or income generated by the funded project, i.e., water treatment systems or toll roads. 
• Regulation and Governance: SEBI regulations on municipal debt securities govern these bonds. Issuers will need a formal credit rating from leading agencies like ICRA, CRISIL or CARE. 
• Market Incentives: Several programs like AMRUT 2.0 and others offer financial incentives to reduce borrowing costs, backed by issuances from top cities like Pune or Indore. 
• Taxation and Risks: Interest is usually taxable unless specific exemptions apply. Secondary market liquidity is lower, and credit risk depends on the issuing civic body's financial health. 

Municipal bonds undergo stringent credit-rating procedures to attract more institutional and retail investors. The local body’s financial health is thoroughly assessed, while some bonds also offer tax-free income, making them attractive choices for high-net-worth investors.

Investors can earn stable returns while contributing directly to the development of the local communities and cities. 

Types of Bonds Based on Interest / Coupon Structure

Several kinds of bonds are based on their interest, or coupon, structure. The coupon, or interest, structure determines how and when you receive income as an investor, which directly affects the risk profile and cash flow. Let us look at them more closely below: 

Fixed-Rate Bonds

Fixed-rate bonds are traditional debt instruments. In this scenario, the coupon rate stays constant throughout the bond's tenure. When an investor purchases this bond, the issuer promises a fixed interest rate. In India, corporate companies and the Government frequently issue these bonds to get long-term funding. 

• Meaning: It is a debt instrument that pays a predetermined, fixed interest rate (coupon) throughout the tenure. The issuer returns the principal amount to the investor at maturity. 
• Issuance: You lend money to the issuer, i.e., the Government of India (G-Secs), PSUs (public sector undertakings), or private corporations. 
• Coupon Payments: The issuer will pay interest (quarterly, monthly, annually, or semi-annually) calculated as a fixed percentage of the bond's face value. For instance, a ₹2,00,000 bond with an 8% annual coupon will pay ₹16,000 per year. 
• Maturity: Bond maturities vary widely by issuer and instrument, and the issuer repays the original principal when the bond tenure ends. 
• Constant Returns: The interest rate stays locked from the purchase date, making future income predictable and calculable. 
• Secondary Market Trading: Several fixed-rate bonds are listed on stock exchanges like the BSE and NSE. This lets investors buy or sell them before maturity. 
• Types: Government securities, corporate bonds and tax-free bonds issued by select PSUs like the IRFC or NHAI. 

These bonds suit risk-averse individuals or retirees seeking regular, scheduled interest payouts and higher principal safety.

If market rates fall in the future, the higher locked-in rate will also stay intact. Of course, these bonds carry interest rate, inflation, and credit risks. 

Yet, predictability remains the strong suit of fixed-rate bonds, where you will know your earnings from the outset. But watch out if the RBI increases the benchmark interest rates. In this case, they may become less attractive, leading to a dip in their market prices. However, they will also gain value if market rates fall. 

Floating-Rate Bonds (FRBs)

FRBs (floating-rate bonds) have interest rates that reset periodically based on a predefined benchmark. The coupon moves in sync with prevailing market conditions.

The RBI issues sovereign FRBs in India, where the coupon is usually linked to a benchmark, such as the average yield at the cut-off prices of 182-day Treasury Bills, plus a fixed spread determined at the auction. 

• Meaning: These are debt instruments in the Indian market where interest payments change periodically based on the benchmark market rate (instead of remaining fixed). 
• Variable Interest: Unlike regular bonds that pay the same rate throughout, these bonds adjust their coupon/interest rates at periodic intervals. 
• Calculation: The coupon is generally calculated as a specified benchmark rate plus or minus a fixed spread, with the benchmark and reset frequency defined in the bond's terms.
• Reset Frequency: Rates usually reset every 6 months. 

A floating-rate bond may lower interest rate risk relative to comparable fixed-rate bonds when market rates rise, depending on the reset mechanism and benchmark. They also offer price stability and reduce interest-rate/duration risk. However, you cannot predict specific future earnings, and they often start with lower interest rates than long-term fixed bonds with the same maturities. Returns may also drop if the RBI enters a cycle of rate cuts.

Zero-Coupon Bonds

Zero-coupon bonds are debt securities which do not pay out any periodic interest. Instead, they are issued at deep discounts and redeemed at full face value at maturity. They may suit retail and institutional investors seeking more long-term and predictable capital appreciation. Here are some of their key aspects: 

• No Periodic Payouts: Unlike regular bonds, you will not get any monthly, annual interest (coupon) or half-yearly credits. 
• Deep Discount Pricing: You will buy the bond at a price considerably below its stated face value (par value). 
• Lump-Sum Maturity Payout: When the bond matures, you will get the full face value from the issuer. 
• Profit Calculations: Your overall return is the specific difference between the discounted purchase price and the final face value. 
• Types: Common types in this category include Treasury bills, PSU and institutional bonds, and corporate zero-coupon bonds used to fund long-term projects. 
• Pricing Formula: Price = Face Value/(1+r)^n. Here, n is the number of years to maturity and r is the expected interest rate or yield. 
• Interest Rate Sensitivity: Since all the cash flows take place at the end, these bonds will see higher volatility in prices in the secondary market (when interest rates change as compared to coupon-paying regular bonds). 
• Reinvestment Risk: Zero, since there are no interim interest payouts to reinvest at prevailing market rates. 

They may suit long-term financial objectives, such as retirement or children's higher education. This is because the full payout comes as a final lump sum, although they are sensitive to interest rate swings before maturity and may create tax liabilities on accrued capital gains. 

They are not ideal for those looking for regular income to meet daily needs. Taxation depends on whether the security is listed on a recognised stock exchange and the holding period. Listed bonds will attract applicable short-term or long-term capital gains tax rates. For transfers on/after July 23, 2024, listed bonds/debentures generally use a 12-month long-term holding period. LTCG (long-term capital gains) is usually 12.5% minus indexation. Unlisted bonds and debentures are subject to special regulations under Section 50AA. They are treated as short-term capital assets, irrespective of the holding period in relevant scenarios.  These gains are taxed as per the investor’s applicable income tax slab rate. 

Types of Bonds Based on Special Features

Bonds also come in several kinds based on special features or attributes. In the Indian market, they may offer unique risk-reward profiles tailored to diverse investors, going beyond regular fixed-income terms to provide more flexibility. Let us take a look at them below: 

Convertible Bonds

They are hybrid debt instruments which give you the right, but not the obligation, to exchange your bond holdings into a predetermined number of equity shares of the issuing entity. Some of their key aspects include: 

• They are widely issued in India as FCCBs (Foreign Currency Convertible Bonds) for fundraising overseas or as domestic CCDs (Compulsorily Convertible Debentures). They usually automatically convert at maturity. 
• Because of the embedded equity option, issuers may offer lower coupon rates, reducing immediate debt costs. 
• Investors may benefit from higher downside protection with fixed interest payments, while still having the chance to participate in India’s high-growth sectors. 
• Convertible bonds are thus a strategic tool for delaying the equity dilution until the business grows and expands. 
• Yet, if the stock does not perform as expected, investors may stick with the lower yield. Hence, conversion will ultimately dilute existing shareholders' voting power. 

Callable and Puttable Bonds

Callable and puttable bonds include embedded options that give issuers or investors the right to alter the bond's original maturity schedule. Here are some key aspects worth knowing in this regard: 

• A callable bond gives the issuer the right to redeem the debt before its official maturity date at a specified call price. Indian PSUs (public sector undertakings) and corporates mostly exercise this option when market interest rates fall. This helps them refinance the debt at a lower borrowing cost. 
• A puttable bond gives investors the right to force issuers to repay the principal amount before maturity. This feature is especially beneficial when market interest rates rise, since investors can exit the low-yield bond and reinvest their capital in higher-yielding market instruments. 
• Since callable bonds mostly favour the issuer, they may offer higher yields to compensate investors for reinvestment risk. 
• Conversely, puttable bonds favour investors, so they offer lower coupon rates. 

Perpetual Bonds

Perpetual bonds are commonly called Consols in the Indian market. They are fixed-income securities with no designated maturity date. Here are some major aspects worth understanding in this regard: 

• Issuers of these bonds have no obligation to redeem the principal amount. Rather, they promise to keep paying steady interest coupons for an indefinite length of time, subject to the regulatory and contractual conditions. 
• Perpetual bonds in the Indian market are mostly issued by commercial banks to meet strict Basel III regulatory capital requirements. 
• While they may offer considerably higher coupon rates than regular corporate bonds to attract more capital, they may carry higher structural risks. 
• Most perpetual bonds include embedded call options, allowing banks to redeem them after a set period (usually 5 to 10 years). 
• Yet, under RBI regulations, if a bank's capital adequacy ratio falls below a crucial threshold, the issuer can write down the principal or skip interest payments without defaulting.  
• Unlike regular corporate bonds, these instruments are tailored to safeguard depositors by transferring financial stress to bondholders. This is done through two main systems governed by the RBI, namely CET1 Triggers (going-concern loss absorption) and the PONV (point of non-viability) triggers (gone-concern loss absorption). 
• They are therefore attractive options to high-net-worth investors and institutional players. 

Inflation-Linked Bonds

Inflation-linked bonds (ILBs) are specialised debt securities tailored to safeguard investors' purchasing power from inflation and its eroding effects. 

• The RBI issued CIBs (capital-indexed bonds) and IIBs (inflation-indexed bonds) in India. 
• In this case, the principal amount and sometimes the coupon payments are linked to a recognised inflation index. Examples include the Wholesale Price Index (WPI) or the Consumer Price Index (CPI). 
• When inflation rises, the bond’s principal value is adjusted upward accordingly. Afterwards, the fixed coupon rate is calculated on this newly increased principal value. This leads to higher absolute cash payouts for investors. 
• At maturity, the investor receives either the adjusted principal or the original face value (whichever is higher), providing better capital protection. 
• Pension funds, insurance companies, and other long-term institutional investors mainly prefer these bonds because they seek real, inflation-adjusted returns. 
• However, their secondary market liquidity is still relatively lower in India than that of regular Government securities.  

Tax-Oriented Bond Types in India

India offers diverse tax-oriented bond types you should also know about. Here are the types viewed from this perspective. 

Tax-Free Bonds

Tax-free bonds are fixed-income financial instruments mainly issued by Government-backed entities to fund large infrastructure and development projects. Here are some key aspects: 

• These bonds are mainly issued by leading PSUs (public sector undertakings), such as the Rural Electrification Corporation (REC), National Highways Authority of India (NHAI) and the Indian Railway Finance Corporation (IRFC). 
• The main attraction of these bonds is present in their unique tax structure for taxes. Under Section 10(15)(iv)(h) of the Income Tax Act, the interest income earned is fully exempt from income tax. 
• As an investor, you will not have to pay any taxes on the semi-annual or annual coupon payments. No TDS or tax is deducted at source. 
• Yet, any capital gains realised from selling the bonds in the secondary market before maturity will be taxable. 
• These instruments usually have long-term maturity periods of 10, 15, or 20 years, making them suitable for preserving wealth over the long haul. Because they are backed by the Government, they offer high safety and near-zero default risk. 
• They are attractive to those in the highest income tax brackets, since the yields may often outstrip the post-tax returns of regular fixed deposits. 
• Fresh issuances have been discontinued by the Indian Government, although they are still actively traded on the secondary market. 

Capital Gains (54EC) Bonds

Capital gains, or Section 54EC, bonds are highly specialised investment options tailored for those looking to lower tax liabilities from selling long-term capital assets. Some of their key aspects include: 

• To qualify for tax exemptions, investors must reinvest their capital gains in these bonds within six months of selling buildings or land. 
• These instruments are mostly issued by infrastructure-focused public sector organisations approved by the Government. Examples include Power Finance Corporation (PFC), REC and IRFC. 
• Under Section 54EC of the Income Tax Act, the amount invested is exempt from capital gains tax. However, this is subject to a maximum investment threshold of ₹50 lakh per financial year. 
• These bonds have a compulsory lock-in period of five years, during which you cannot pledge them as collateral for a loan or transfer and sell them. 
• They have fixed interest rates set by the Government at the time of issuance. 
• While the principal capital gains amount is tax-exempt, the annual interest you get on these bonds is fully taxable (based on your applicable income tax slab rate). 
• Investors who want to protect profits from property sales often prefer them. 

Other Ways Bonds Are Classified

Alongside the classification models listed above, bonds are also classified in India in other ways. Some of them include: 

Classification by Collateral and Risk: 

• Secured Bonds: These bonds are supported by specific tangible assets or collateral owned by the issuer. This makes them safer choices for investors. 
• Unsecured Bonds: These bonds (debentures) have no collateral support. They depend entirely on the issuer’s reputation and creditworthiness. 
• Subordinated Bonds: These bonds rank below other senior debts in the event of default or liquidation. This means they carry higher risk, though they may offer higher yields. 

Classification by the Listing Status: 

• Listed Bonds: These bonds are officially registered and traded on recognised stock exchanges, such as the BSE or the NSE. This enables better liquidity for investors. 
• Unlisted Bonds: These bonds trade OTC (over-the-counter) or through private placements. They are not traded actively on public stock exchanges. 

Choosing The Right Type of Bond

Choosing the right type of bond depends on several factors, including your income requirements, investment horizon and risk appetite. 

• G-Secs: May be suitable for conservative investors who are seeking zero credit risk and the highest level of capital safety. 
• Corporate Bonds: Suitable for investors with a higher risk tolerance than Government bonds but who want slightly higher yields. You can assess based on the issuer’s credit rating. 
• Tax-Free Bonds: May be relevant to investors in higher tax brackets because their tax-exempt interest can improve post-tax returns relative to taxable bonds with similar risk characteristics
• Municipal/PSU Bonds: May suit investors seeking competitive yields with local project backing. 

Consider Government bonds for the highest safety and corporate bonds for higher yields (with higher risks). For more tax efficiency, consider tax-free PSU bonds if you already fall in the highest income-tax bracket. 

Choosing Based on the Rating Scale: 

Another way to choose corporate bonds is through the common rating scale followed by leading evaluators in the country, such as ICRA, CRISIL or CARE. Here is a guide to the ratings to help you make an informed decision: 

*Note that there are modifiers (+ or -) to indicate relative standing within any segment. Higher ratings may mean lower interest payouts since the risks are lower.

Lower-rated bonds offer higher yields to attract buyers despite the higher risks. Ratings are not permanent; agencies may upgrade or downgrade issuers as financials change. 

Conclusion

As you can see, several kinds of bonds are available in the Indian market. Choose based on your risk appetite, investment horizon, and whether you want regular income. The rating scale also matters when you’re choosing corporate bonds, since it signals the issuer’s financial health and ability to repay. Knowing each bond type will help you add value to your investment portfolio. 

Disclaimer: This blog is solely for educational purposes. The securities/investments quoted here are not recommendatory.