Types of Bonds in India: A Deep Dive Classification.

The Indian bond market is a vast ocean comprising over $2 trillion in assets. For a new investor, the terminology can be overwhelming. Is a 'Debenture' different from a 'Bond'? What exactly is a 'Perpetual' bond? And why do some bonds pay zero interest?

Broadly, bonds in India are classified based on the Issuer (who is borrowing) and the Structure (how they pay you back). This guide covers every major type you can buy today.

1. Government Securities (The "Sovereign" Basket)

These are issued by the Reserve Bank of India (RBI) on behalf of the Central or State Governments. They carry a Sovereign Guarantee, meaning the chance of default is theoretically zero.

A. Treasury Bills (T-Bills)

These are short-term instruments for money market management. They are unique because they do not pay regular interest.

• Tenure: 91 days, 182 days, or 364 days.
• How you earn: They are issued at a discount (e.g., ₹98) and redeemed at Face Value (₹100). The ₹2 profit is your return.
• Liquidity: Extremely high. Used by banks to park excess cash.

B. Dated G-Secs

These are the backbone of the Indian debt market. They are called "Dated" because they have a specific maturity date, often 5 to 40 years in the future.

Example name: 7.18 GS 2033. This means:

• 7.18%: The fixed coupon rate (interest) per year.
• GS: Government Security.
• 2033: The year the principal will be returned.

C. State Development Loans (SDLs)

Just like the Central Government, State Governments (like Maharashtra, Gujarat, Bihar) also borrow money. These bonds are called SDLs. While they technically carry slightly more risk than Central G-Secs, the RBI manages their issuance, making them practically risk-free. They typically offer 0.30% - 0.50% higher yield than central G-Secs.

2. Corporate Bonds (Debentures)

When a private company needs money for a new factory or business expansion, it issues bonds. In India, these are legally termed "Debentures".

A. Non-Convertible Debentures (NCDs)

These are pure debt instruments. You lend money, get interest, and get your principal back. They cannot be converted into shares of the company. These are what you typically buy on platforms like GoldenPi or Wint Wealth.

B. Convertible Debentures

These give the investor the option to convert the debt into equity shares of the company after a certain period. Usually, the interest rate offered here is lower because of the potential upside from the stock price.

3. Zero Coupon Bonds (Deep Discount Bonds)

As the name suggests, these bonds pay zero interest during their life. So why buy them?

They are sold at a massive discount to their face value. For example, you might buy a bond today for ₹60, and 10 years later, the company pays you ₹100. The difference (₹40) is your profit.

Tax Advantage: Since there is no annual interest payout, you don't pay tax every year. The entire gain is taxed only at maturity (usually as Capital Gains), allowing for tax deferral.

4. Perpetual Bonds (AT1 Bonds)

These became famous (or infamous) during the Yes Bank crisis. AT1 (Additional Tier-1) Bonds are issued by banks to meet their Basel III capital requirements.

The Catch:

• No Maturity: They technically have no fixed maturity date. The bank can call them back after 5 or 10 years, but it's not obligated to.
• Risk of Write-off: If the bank's capital ratios fall below a critical level, the RBI allows the bank to write off these bonds completely. Investors can lose 100% of their principal, even if the bank doesn't close down.

They offer high interest rates (often 9-10%), but are suitable only for sophisticated investors who understand the risks.

5. Sovereign Gold Bonds (SGBs)

Issued under the Government Securities Act, 2006, these are a superior alternative to physical gold.

• Returns: You get the market return of Gold + a fixed 2.5% interest per year.
• Taxation: If held till maturity (8 years), the capital gains tax is zero.
• Safety: No risk of theft or purity issues (unlike physical jewelry).