Treasory Bonds

Treasury bonds are vital instruments in the financial architecture of a nation. As long-term debt securities issued by the government, they help mobilize funds for public needs like infrastructure, social programs, and development initiatives. For many investors, these bonds present an attractive option: lower risk, relatively stable income, and alignment with broader fiscal goals. Whether you are new to fixed-income investing or an experienced investor, understanding how treasury bonds function, their advantages and limitations, and how they compare with other instruments can equip you to make better financial decisions.

Treasury bonds (often called “dated government securities” or “G-Secs” in India) are long-term debt instruments issued by the government with maturities typically ranging from 10 to 30 years (though in some cases longer or shorter tenors may exist). These securities are backed by the full faith and credit of the sovereign issuer, making them among the safest fixed-income instruments in the market.

When you purchase a treasury bond, you are essentially lending money to the government. In return, the government pays interest (coupon payments) periodically (e.g., semiannually) and returns the principal amount at maturity.

Key characteristics of treasury bonds:

• Issuer: The Government (Central or State)
• Maturity: Long-term (often 10 to 30 years; some dated G-Secs longer or shorter)
• Risk: Low credit/default risk (given sovereign backing)
• Returns: Fixed (or occasionally floating) coupon payments
• Liquidity: Tradable in secondary markets, though liquidity may vary

Because of their safety and steadiness, treasury bonds often appeal to investors who prefer lower volatility in their portfolios.

In India, the government issues several variants of sovereign debt to meet differing investor needs. Below is a breakdown of the principal categories:

Treasury Bills (T-Bills)

• T-Bills are short-term government securities, with maturities typically of 91 days, 182 days, or 364 days. CoinSwitch+2WintWealth+2
• They are “zero-coupon” instruments — meaning they are issued at a discount to face (par) value and redeemed at par, with the yield being the difference between purchase price and redemption value. CoinSwitch
• Because they don’t pay periodic interest, their return is baked into that discount amount.
• T-Bills are highly liquid and considered extremely safe, making them suitable for temporary parking of funds. However, they are exposed to inflation risk if used for longer durations than intended.

Dated Government Securities (G-Secs)

• These are longer-term bonds issued by the central government, generally with tenors exceeding one year (e.g. 5, 10, 20, 30 years). WintWealth+2Outlook Money+2
• They typically offer fixed coupon (interest) payments, usually paid semiannually. Moneycontrol+1
• Investors can trade these bonds on secondary markets after issuance, subject to prevailing market demand and yields.

Sovereign Gold Bonds (SGBs)

• Sovereign Gold Bonds allow investors to gain exposure to gold without holding physical gold. They are denominated in grams of gold. Wikipedia+2WintWealth+2
• They carry a fixed interest rate (2.5% per annum in past issues), payable semiannually, in addition to gold price appreciation. Wikipedia+1
• Tenure is typically 8 years, with an option for early exit after the fifth year (on certain dates). Wikipedia
• However, note that no new SGB tranches have been issued after February 2024, as the government deemed the scheme expensive compared to traditional borrowing methods. Wikipedia

Floating Rate / Indexed Bonds

• The RBI/issues also floating-rate savings bonds, where the coupon resets periodically based on a benchmark (e.g. linked to the National Savings Certificate rate plus a margin). ClearTax+1
• These instruments help mitigate interest rate risk, as their coupons adjust with market conditions.
• They may have specific lock-in or early withdrawal provisions (e.g., senior citizens may be allowed earlier exit). ClearTax

To understand treasury bonds fully, it helps to walk through their lifecycle:

1. Issuance / Auction
   The government issues Treasury bills and dated securities through auctions managed by the Reserve Bank of India (RBI), inviting bidders to place competitive or non-competitive bids. mint+2Outlook Money+2
2. Subscription / Allocation
   In a non-competitive bid, you accept the yield determined by the auction. Competitive bidders specify the yield they are willing to accept. Allocation is done per auction rules.
3. Interest (Coupon) Payments
   For dated securities, periodic interest (usually semiannual) is paid to bondholders, either via credit to the bank account or in their securities accounts.
   (Note: T-Bills do not pay periodic interest.)
4. Maturity / Redemption
   At maturity, the government redeems the security at face value (par), returning the principal to the investor.
   For bonds, the final coupon payment is made along with principal.
5. Secondary Market Trading
   After issuance, many treasury bonds are tradable on secondary markets (via systems like NDS-OM). Liquidity depends on market demand, outstanding supply, and interest rate changes. Outlook Money+2blog.thealtinvestor.in+2
6. Auto-bidding / Reinvestment (for T-Bills)
   The RBI’s Retail Direct platform has introduced features like auto-bidding, where investors can pre-schedule bids (e.g. reinvestment of maturity proceeds into new T-Bills) via NACH mandates. ETBFSI.com+2The Economic Times+2

Thus, treasury bonds combine the predictability of periodic payments with the flexibility of secondary trading, offering a balance of stability and optional liquidity.

Investing in treasury bonds offers several advantages, which can be valuable especially for conservative or long-horizon investors:

• Predictable Income
  Coupons are typically fixed and known in advance, providing a stable stream of cash flows.
• Low Credit Risk
  As these instruments are backed by the sovereign, default risk is generally negligible.
• Diversification and Portfolio Stability
  Bonds often have low correlation with equities, so including them can reduce overall portfolio volatility.
• Transparent Pricing and Liquidity (in many cases)
  Secondary markets enable buyers and sellers to transact, leading to price discovery and exit options (though liquidity may vary).
• Protection in Downturns
  In times of equity market stress, government bonds typically fare better (or decline less), acting as a buffer.
• Cost Efficiency (when using direct platforms)
  Platforms like RBI Retail Direct allow individuals to invest in government securities without intermediaries, reducing transaction costs. Vajiram & Ravi+3Outlook Money+35paisa+3
• Convenience Features
  Auto-bidding, SIP-like scheduling, and direct access make it easier to maintain regular investment discipline. blog.thealtinvestor.in+25paisa+2

Despite their reputation for safety, treasury bonds are not entirely risk-free. Investors should consider the following:

• Interest-Rate Risk
  If interest rates rise after you buy a bond, its market value may fall. This is especially relevant if you plan to sell before maturity.
• Inflation Risk
  Over long holding periods, inflation may erode the real (inflation-adjusted) return from coupons and principal.
• Liquidity Risk
  Although many government bonds trade in secondary markets, liquidity can be lower than equity markets, especially for lesser-known or illiquid tenors.
• Reinvestment Risk
  Coupon payments may need to be reinvested in a lower yield environment, reducing total returns.
• Call / Prepayment Risk (in some cases)
  Certain government bonds may have embedded call features, allowing early redemption, though this is less common in India.
• Taxation & Regulatory Changes
  Changes in tax laws or government regulations can affect the net return from these bonds.

It is important to assess how each of these risks aligns with your investment horizon, return expectations, and risk appetite.

Here’s a comparative snapshot to help you see how treasury bonds stack up against popular alternatives:

• Risk vs Return: Equities offer potentially higher returns but come with greater volatility. Treasury bonds and T-Bills are more stable but generally offer lower yields.
• Liquidity: FDs and mutual funds often allow easier redemption. Bonds offer tradability, but the ease depends on demand and market depth.
• Management: Bonds bought directly require you to manage maturity, reinvestment, and buy/sell decisions. Mutual funds handle these on your behalf.
• Tax Efficiency: For instruments held till maturity, capital gains tax may not apply (depending on tax rules). However, if sold earlier, capital gains tax will apply and interest is taxed as per your slab.

In sum, government bonds are best suited for investors prioritising safety and predictable returns, often as a stable core in a broader, diversified portfolio.

Purchasing treasury bonds in India has become far more accessible in recent years, especially with the introduction of the RBI Retail Direct platform. Here’s a high-level overview of the process:

1. Open an RBI Retail Direct / RDG Account
   Via the RBI’s official Retail Direct portal, you can register a Retail Direct Gilt (RDG) account to hold government securities directly. Outlook Money+2rbiretaildirect.org.in+2
2. Complete KYC / Verification
   You will need a PAN, a linked savings bank account, Aadhaar and valid mobile/email for OTPs and identity verification. Outlook Money+2Vajiram & Ravi+2
3. Link Bank and Set Payment Mandates
   For automatic investments or auto-bidding in T-Bills, you may need to authorize NACH (debit mandate). blog.thealtinvestor.in+2ETBFSI.com+2
4. Participate in Primary Auctions
   Via the portal, select the security (T-Bill, dated G-Sec, or other eligible bond), place a non-competitive or competitive bid during the auction window, and await allocation. mint+2Outlook Money+2
5. Hold / Trade in Secondary Market
   After allocation, your holdings will be visible in your RDG or demat account. You may trade the security via secondary markets (e.g. NDS-OM) if desired. Outlook Money+2blog.thealtinvestor.in+2
6. Receive Coupons & Redemption
   Interest payments and eventual redemption proceeds will be credited to your linked bank account.

Minimum Investment
The minimum investment threshold for most government securities is ₹10,000 (in multiples of ₹10,000). Outlook Money+3IndusInd Bank+3ultra+3
Some sources also mention that SGB investments start from one gram of gold equivalent, and there may be upper limits in certain cases. Vajiram & Ravi+2WintWealth+2

Because the platform is direct (no intermediaries), transaction and custodial costs are minimal or nil. 5paisa+2Outlook Money+2

Thus, through RBI Retail Direct (or through approved intermediaries or banks), investors can participate in primary government securities issuances and access secondary market trading.

Tax rules are critical for assessing the net returns from government securities. Here’s how they currently work in India:

• Interest Income
  Coupon payments are taxed as ordinary income, according to the investor’s applicable income tax slab.
• Capital Gains
  If you sell the bond before maturity, capital gains tax may apply. The rate depends on the holding period and whether it is classified as short term or long term under prevailing tax laws.
• Asset Held Till Maturity
  If you hold the bond until maturity, capital gains tax typically does not apply (because there is no gain realized by sale). However, the interest earned is still taxed.
• TDS / Withholding
  In some cases, tax may be withheld at source (TDS) on interest or capital gains per applicable rules. It’s wise to check current notifications or consult a tax professional.

Since tax laws and regulations can change, always verify the latest provisions and consult a tax advisor when planning investments in government securities.

Treasury bonds form a foundational component of secure, income-oriented investing. Their sovereign backing, comparatively low risk, and predictability make them a dependable instrument—especially for investors who place capital preservation and regular income above high-risk returns. That said, no investment is entirely without downside: interest rates, inflation, liquidity constraints, and tax changes can all impact outcomes.

By clearly understanding how these securities work, evaluating their risks, and considering how they fit into your broader portfolio, you can make informed decisions and utilize treasury bonds as a stable anchor in your investment strategy.

Disclaimer: Investments in securities are subject to market risks. Prior to investing, please read all relevant scheme documents and consult qualified advisors. Past performance is not a guarantee of future results.