Bond refers to a security issued by a company, financial institution or government which offers regular or
fixed payment of interest in return for borrowed money for a certain period of time.By purchasing a bond, an
investor loans money for a fixed period of time at a predetermined interest rate. While the interest is paid
to the bond holder at regular intervals, the principal amount is repaid at a later date, known as the maturity
date. While both bonds and stocks are securities, the principle difference between the two is that bond holders
are lenders, while stockholders are the owners of the organization.
Another difference is that bonds usually have a defined term, or maturity, after which the bond is redeemed,
whereas stocks may be outstanding indefinitely. An exception is a consol bond, which is a perpetuity
(i.e., bond with no maturity). Thus a bond is like a loan: the issuer is the borrower (debtor), the holder is
the lender (creditor), and the coupon is the interest. Bonds provide the borrower with external funds to
finance long-term investments, or, in the case of government bonds, to finance current expenditure.
Certificates of deposit (CDs) or commercial paper are considered to be money market instruments and not bonds.
Bonds must be repaid at fixed intervals over a period of time
TAXFREE BONDS (Salient Features)
- Eligibility for
Investment
The Bonds may be held by -
- 1An individual, not being a Non-Resident Indian (NRI)
In his or her individual capacity
In an individual capacity on joint basis
In an individual capacity on anyone or survivor basis
On behalf of a minor as father / mother / legal guardian
- 2A Hindu Undivided Family
- 3Charitable Institution
'Charitable Institution' to mean a Company registered under Section 25 of the Indian
Companies Act 1956.
In an individual capacity on joint basis.
An institution which has obtained a Certificate of Registration as a charitable
institution in accordance with a law in force;
Any institution which has obtained a certificate from Income Tax Authority for the
purpose of Section 80G of the Income Tax Act, 1961.
- 4"University" means a university established or incorporated by a Central,
State or Provincial Act, and includes an institution declared under section 3 of
the University Grants Commission Act, 1956 (3 of 1956), to be a university for the
purposes of that Act.
- Limit of Investment
There is no maximum limit for investment in the Bonds.
- Tax Treatment
- 1Income-Tax: Interest on the Bonds will be taxable under the Income-Tax Act,
1961 as applicable according to the relevant tax status of the bond holder.
- 2Wealth Tax: The Bonds will be exempt from Wealth-tax under the Wealth- Tax
Act, 1957.
- Issue Price
- 1The Bonds will be issued at par i.e. at Rs.100.00 percent.
- 2The Bonds will be issued for a minimum amount of Rs. 1000/- (face value)
and in multiples thereof. Accordingly, the issue price will be Rs.1000/- for every
Rs.1,000/-(Nominal).
- Subscription
Subscription to the Bonds will be in the form of Cash/Drafts/Cheques. Cheques or
drafts should be drawn in favour of the Receiving Office, specified in paragraph
10 below and payable at the place where the applications are tendered.
- Date of Issue
- 1The Bonds will be issued with effect from 21st April 2003.
- 2The date of issue of the Bonds in the form of Bond Ledger Account will be
the date of receipt of subscription in cash or the date of realisation of draft/cheque.
- Form
- 1The Bonds will be issued and held at the credit of the holder in an account
called Bond Ledger Account (BLA).
- 2New Bond Ledger series with the prefix (TB) are to be opened. All investment
in 8% Savings (Taxable) Bonds by an existing BLA holder will be viewed as a new
investment under a new BLA.
- 3The Bonds in the form of Bond Ledger Account will be issued by and held
with designated branches of the agency banks and SHCIL as authorised by Reserve
Bank of India in terms of paragraph 10 below.
- 4The Certificate of Holding in respect of Bond Ledger Account will be issued
in Form TBX or Form TBY as applicable for non-cumulative and cumulative investments
respectively.
- 5The Certificate of Holding in respect of cash applications may be issued
on the same day as per the extant instructions.
- Applications
- 1Applications for the Bonds may be made in Form ‘A’ (Annex 2) or in any other
form as near as thereto stating clearly the amount and the full name and address
of the applicant.
- 2Applications should be accompanied by the necessary payment in the form
of cash/drafts/cheques as indicated in paragraph 6 above.
- 3Applicants who have obtained exemption from tax under the relevant provisions
of the Income Tax Act, 1961, shall make a declaration to that effect in the application
(in Form 'A') and submit a true copy of the certificate obtained from Income-Tax
Authorities.
- Receiving Offices
Applications for the Bonds in the form of Bond Ledger Account will be received at:
- 1Authorised Branches of State Bank of India, Associate Banks, Nationalised
Banks, four private sector banks and SHCIL as specified in the Annex 3.
- 2Any other bank or branches of the banks and SHCIL as may be specified by
the Reserve Bank of India in this regard from time to time.
- Nomination
A sole holder or a sole surviving holder of a Bond, being an individual, may nominate
in form B (Annex – 4) or as near thereto as may be, one or more persons who shall
be entitled to the Bond and the payment thereon in the event of his/her death.
- Transferability
The Bond in the form of Bond Ledger Account shall not be transferable.
- Interest
- 1The bond will be issued in cumulative and non-cumulative form, at the option
of the investor.
- 2The Bond will bear interest at the rate of 8% per annum. Interest on non-cumulative
bonds will be payable at half-yearly intervals from the date of issue in terms of
paragraph 7 above. Interest on cumulative bonds will be compounded with half-yearly
rests and will be payable on maturity along with the principal. In the latter case,
the maturity value of the Bonds shall be Rs.1601/- (being principal and interest)
for every Rs.1,000/-(Nominal). Interest to the holders opting for non-cumulative
Bonds will be paid from date of issue in terms of paragraph 7 above upto 31st July/31st
January, as the case may be and thereafter at half-yearly for period ending 31st
July/31st January on 1st August and 1st February. Interest on Bond in the form of
"Bond Ledger Account" will be paid, by cheque/warrant or through ECS by credit to
bank account of the holder as per the option exercised by the investor/holder.
- Advances / Tradeability
against Bonds
The Bonds shall not be tradeable in the secondary market and shall not be eligible
as collateral for loans from banks, financial Institutions and Non Banking Financial
Companies, (NBFC) etc.
- Repayment
The Bonds shall be repayable on the expiry of 6 (Six) years from the date of issue.
No interest would accrue after the maturity of the Bond.
Government Securities (G-Secs) are debt instruments issued by central and state
governments, offering investors a safe, fixed-income investment. Backed by the
government, they carry minimal credit risk. These securities include Treasury Bills
(T-Bills) for short-term borrowing, Government Bonds (dated securities) for longer-term
needs, and State Development Loans (SDLs) issued by state governments. Investing in
G-Secs provides portfolio diversification, stable returns, and liquidity through the
secondary market. Retail investors can directly participate via the RBI Retail Direct
Scheme or through banks and brokers. Understanding yield, interest rate risks, and tax
implications is crucial before investing.
Market Information
Market-Linked Debentures (MLDs) are debt instruments with returns tied to an underlying
market index, offering potential gains but also carrying significant risks. Unlike
traditional bonds, MLD returns are not fixed and depend on the index's performance,
making them complex investments. Investors must understand the associated market risk,
the issuer's credit risk (especially concerning principal protection, which is subject
to the issuer's financial stability), and potential liquidity challenges. Regulatory
oversight by SEBI mandates transparency and disclosure, and investors should diligently
review offer documents, assess their risk tolerance, and consider seeking professional
financial advice before investing in MLDs.
- What are MLDs?
MLDs are debt securities where returns are linked to the performance
of a market index, like the Nifty 50.
- Is my principal guaranteed?
In India, only principal protected MLDs are allowed. Principal
protection depends on the issuer's creditworthiness. If the issuer
defaults, you may lose your principal.
- Are MLD returns fixed?
No, returns vary based on the underlying index's performance. You could
get zero or very low returns.
- What are the risks of investing in MLDs?
Market risk (index fluctuations), credit risk (issuer default), and liquidity risk (difficulty selling before maturity).
- How are MLDs taxed?
In India, gains from Market Linked Debentures (MLDs) are now taxed as
short-term capital gains (STCG) regardless of holding period, at the
investor's applicable tax slab rate, after a change in tax rules
effective April 1, 2023.
- Are MLDs suitable for all investors?
No. They are complex and suitable for investors with a high risk
tolerance and understanding of market dynamics.
- Where can I find information about MLDs?
The offer document, issuer's website, and financial advisors.
- What is the minimum investment allowed for MLDs?
SEBI has recently changed the minimum investment amount to 1 Lac to allow more retail investors access to these
instruments.
- How do I assess the issuer's credit risk?
Check the credit ratings assigned to the issuer by reputable rating
agencies.