What Is Government Security? T-Bills, T-Bonds, and More
What is Government Security?
The Government of India issues securities such as treasury bills, dated securities and bonds through the Reserve Bank of India (RBI) to raise capital for development projects like special infrastructure construction, military projects, aviation, etc. These tradable securities are issued by both the Central Government and State Government.
The Central Government issues treasury bills, dated securities, and bonds whereas the State Government issue only bonds and treasury bills. Historically, the major participants in Government securities were institutional investors but with consistent efforts and initiatives to bring awareness, small investors have also started investing in such government securities.
Types of Government Securities
The Reserve Bank of India issues various Government securities such as Treasury Bills, Cash Management Bills (CMBs), Dated Government Securities, State Development Loans, Inflation-indexed bonds, Zero-Coupon Bonds, Capital Indexed Bonds, Floating Rate Bonds. Lets understand them.
- Treasury Bills (T-bills)
Treasury bills or T-bills are short-term debt instruments issued by the Government of India with guaranteed repayment at a later date. The funds collected through these money market instruments are used to meet the short-term fund requirement of the government.
T-bills are issued generally for 14 days, 91 days, 182 days and 364 days. Treasury bills are zero coupon securities that are issued at a discount, redeemed at the face value on maturity and pay zero interest. According to the regulatory requirements of the Reserve Bank of India, an investor can buy a short-term treasury bill with minimum lot size of INR 10,000.
- Cash Management Bills (CMBs)
The Government of India in consultation with the RBI issues cash management bills to meet the short-term funding requirements. The CMBs are issued for a tenure of fewer than 91 days and have the generic features of treasury bills. They are also issued at discount and redeemed at face value on maturity.
- State Development Loans (SDLs)
SDLs are dated securities issued by the state government through normal auctions. Here, interest is provided half-yearly and the principal is repaid on the maturity date.
- Dated Government Securities
These are long term securities or bonds issued by the Government of India with a fixed or floating interest rate, also known as coupon rate. The tenure of dated securities varies from 5 years to 40 years.
There are nine different types of dated Government Securities-
STRIPS i.e Separate Trading of Registered Interest and Principal of Securities are the securities created by way of separating the coupon cashflows and principal cash flows associated with a regular G-Sec into separate securities. They are like Zero Coupon Bonds (ZCBs) but created out of existing securities and not issued through auctions of other securities.
- Fixed Rate Bonds
These bonds yield the same return throughout the period from the date of issue to the maturity date. Fixed-rate bonds are for those investors who wish to earn guaranteed interest rates for a given tenure. These bonds provide robust protection to the deposited amount
- Floating Rate Bonds
These bonds come up with a variable coupon rate which is re-set at pre-announced intervals. The Floating Rate Bond has a base rate plus a fixed spread and the spread is fixed throughout the tenure of the bond whereas the base rate is reset as per the set inetrvals.
- Special Securities:
The Government of India issues special securities such as oil bonds, fertilizer bonds and food bonds to entities like Oil Marketing Companies, Fertilizer Companies, the Food Corporation of India, etc. as compensation to these companies in lieu of cash subsidies. These securities are long-term securities with a higher coupon over the yield of the dated securities of comparable maturity. The beneficiary entities have the option to divest these securities in the secondary market for raising funds.
- Capital Indexed Bonds (CIB)
The principal of these bonds is linked to an accepted index of inflation with a view to protecting the principal amount of the investors from inflation. These bonds are issued at auctions through bidding. CIB provides a higher yield than nominal bonds to the investors.
- 7.75% Savings Bonds, 2018 (Taxable)
The Government of India issued 7.75% Savings (Taxable) Bonds, 2018 on 10th January 2018 as a replacement for the 8% Saving Bonds. Interest on these bonds are payable on a half-yearly basis. The interest income earned is taxable in the hands of the investors as per the slab rates. These bonds can be purchased by an individual, not a Non-Resident Indian, or a minor with a legal guardian and a Hindu Undivided Family.
- Inflation Indexed Bonds
IIBs are issued by the Reserve Bank of India which gives a constant return and protects the coupon interest and principal amount against inflation. The principal and interest amounts of inflation-indexed bonds are to be adjusted for changes in the consumer price index. The CPI is used as a means of the average change in prices reimbursed by consumers for a basket of goods and services. The minimum amount to be invested by an individual is INR 5000 which can go up to a maximum limit of INR 10 lakh per year.
- Sovereign Gold Bond (SGB):
SGBs are denominated in grams of gold and issued by the Reserve Bank of India. These bonds offer a semi-annual interest at the rate of 2.50% per annum on the initial investment of the investor. SGB comes with a lock-in period of 8 years with an option to redeem it after 5th year.
Government Security gives an investor the maximum safety as they have the sovereign’s commitment for payment of interest and repayment of principal apart from giving return in the form of coupons (interest). If an investor is in need of an urgent cash requirement they can easily sell the government securities in the secondary market as these securities are liquid. These securities can be held either in physical or dematerialized/ scripless form. Thus, government securities are a safe option for those investors who wish to earn steady returns without exposing themselves to high risk.
Frequently Asked Questions (FAQs)
Who are the major investors in Government Securities?
Commercial banks, rural banks, and institutional investors like insurance companies, mutual funds, etc are the major players who invest heavily in government securities.
What are the risks associated with Government Securities?
Although government securities are risk-free, securities and bonds come with an inherent risk i.e. inflation risk. At times, the interest rate earned on these securities is less than the inflation rate.
Is interest income from Government Securities subject to TDS?
No TDS (tax deducted at source) is deducted in the case of government securities.
How are Government Securities issued?
Government securities are issued through auctions by the Reserve Bank of India on their electronic platform, E-Kuber.