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When we want to buy a house or car, we approach bank for a loan. When corporate companies need money, they issue NCDs/Bonds at certain interest rate to raise the needed amount. Don’t know what are NCDs, read our article on it here
In the same way when government need additional money to build infrastructure or to fight against a pandemic, government goes to its bank, the RBI, and ask for a loan. RBI, in turn, issue Treasury Bills (T-Bills) or Bonds to raise the required amount from the market. If you purchase that T-bill or bond, you are lending your money to government, the most trustable borrower. Your capital will have highest amount of safety.
What is the difference between T-Bill and Bond?
Difference lies in maturity period as well as interest payout. T-bills have maturity period less than a year and they don’t offer any interest. Yeah, you read it right. They don’t offer any interest, so why would anyone invest in T-bill? Valid Question! T-bills are issued at a discount to its face value and at the time of maturity, you get the face value.
T-bills come with 91-days, 182-days and 364-days maturity period. Suppose you purchase a T-bill of 91-days period for Rs.97 and if its actual face value is Rs.100, then after 91-days you will receive Rs.100. Your profit here is Rs.3.
On the other hand, government bonds can have longer maturity period up to 40 years and they pay out fixed interest twice a year. Apart from these two categories, there are State Development Loans (SDL) too. States like West Bengal, Telangana, etc. also need additional money to build infrastructure, so they also raise money by issuing bonds through RBI.
You may go through FAQs present at RBI website for more knowledge on G-Sec.
How these securities are taxed?
Gains from T-bills are taxed as Short-term capital gains (STCG) tax, as maturity period is within a year. On the other hand, interest received from government bonds are taxed as per your income tax slab, but no TDS (Tax Deducted at Source) would be deducted.
You can also trade these securities on secondary market. So if you sell government bond within 3 years at some profit without holding it till maturity, then again STCG will be applicable, but if you sale it after holding for more than 3 years without holding it till maturity, then Long-Term Capital Gains (LTCG) tax will be applied.
Read our article on how to invest in these Government Securities