The Reserve Bank of India (RBI) in February said it will open up government bonds for small investors under ‘RBI Retail Direct’, and released guidelines for the scheme on Monday. RBI may notify the date of commencement of the scheme soon. Mint explains:
What’s the RBI Retail Direct scheme?
Individual investors can open Retail Direct Gilt (RDG) Accounts with RBI to buy government bonds. The bonds on offer are government securities (G-Secs) issued by the central government, state development loans that are bonds issued by state governments, and sovereign gold bonds issued by the central government but whose price is linked to gold. You can buy and hold these bonds to maturity, earning regular interest. You can also sell the bonds before maturity in the secondary market. Since they are issued by central and state governments, the default risk is extremely low.
So how does this scheme work?
The investor has to open an account with the central bank on a dedicated portal, using a one-time password sent to his or her email address or mobile number. The investor needs to have a savings account with a bank in India, a permanent account number and an officially valid document such as a driving licence, voter’s identity card or Aadhaar. Non-resident Indians are also allowed to invest in some government bonds. Investors can link their bank accounts to the retail direct scheme and pay for their purchases through net banking or unified payments interface.
How do retail investors buy bonds on this system?
You can buy government bonds in primary auctions, where the central and state governments sell their securities in the debt market. RBI has allowed retail investors to go for ‘non-competitive bidding’. This means you can submit bids without specifying a price. The bonds get allotted to you at a price established by competitive bidding among institutions.
What’s the tax position on government bonds?
Unlike small saving schemes of the Union government such as the Public Provident Fund or National Savings Certificate, there are no special tax benefits on direct purchase of government bonds. The interest on such bonds is taxed at your slab rate. Holding the same bonds indirectly through a mutual fund can be more tax-efficient. The interest accruing from the bonds with the mutual fund gets added to its net asset value and you do not get taxed until you redeem the units.
What if one wants to exit before maturity?
RBI has allowed retail investors access to its Negotiated Dealing System (NDS)-Order Matching (OM). Ordinarily, government bonds on this system are transacted in lots of ₹5 crore. However, RBI has given individuals access to the ‘odd lot’ segment on which bonds of less than ₹5 crore can also be traded. The minimum investment size for government securities has been set at ₹10,000 by RBI in this odd lot segment. You can sell bonds on NDS-OM before maturity. But liquidity in this ‘odd lot’ segment tends to be poor.
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