GoI Dated Securities

Hi all…

Do the interest payment on GoI Dated Securities is cumulative (or) a one-time payment every 6 months?
Is there any tax exemption for the interest income and final gains on the maturity date?

Interest is paid every six months.
There are no tax exemption for GOI dated securities (G-sec)

2 Likes

If you can find a zero coupon bond then you will not get any interest payments regularly but a lump sum on maturity date and the difference between your purchase price and sell price will be taxed as capital gains (for notified bonds) and income slab for non notified bonds What are Zero Coupon Bonds? Who Should Invest in Them?

I haven’t been able to find many zero coupon bonds, do comment below if one knows of any and places to invest in them.

Better to buy a Growth Debt fund if you do not need interest payments, this way you won’t be taxed on the interest and it will be reinvested by the fund, do read up about different debt funds and how repo rate and duration can affect your returns. https://zerodha.com/varsity/chapter/the-debt-funds-part-1/ there are Debt Funds that only invest in Government Backed bonds, you can have a look at them.

1 Like

I don’t think GOI dated securities are issued as Zero coupon bonds. These bonds carry a coupon and is paid every 6 months.

@ShubhS9 @Pratyush_Raj is this indicative is the highest i am going to get? or it might be higher also?

The above screenshot appears to be from
the Coin GSEC page - Kite - Zerodha's fast and elegant flagship trading platform.

A footnote on the above page explains Indicative Yield.

Indicative yields are annualized and based on the last traded price of G-Secs and are only for comparison purposes. The actual yield of the security depends on the weighted average price discovered in the auction. Learn more.

New GS refers to a G-Sec that is being issued for the first time. When a new G-Sec is issued, the yield is discovered through a yield based auction. Learn More

My understanding from reading this is as follows…

The Indicative Yield of a bond is an estimate of the yield
due to the estimated subscription price of the bond,
which is based on an estimate of how much under-subscribed / over-subscribed the bond is expected to be.

For example,
it appears that the 6.67 GS 2035 is estimated/expected to be subscribed at an average price (VWAP) of Rs.96.80.
(instead of the face-value of Rs.100).

Thus Indicative Yield of 667GS2035 = 6.67% * (100 / 96.80) = 6.89%.
Well not exactly!
This is just half the story - Returns from interest/dividend payments.

In addition to the interest payments,
Yield also accounts for the capital gains/losses on maturity.

For example,
if one bought a bond

  • that matures in 5 years,
  • of face-value Rs.100
  • at say Rs.95.

Though one initially paid Rs.95, one would receive Rs.100 when the bond matures.
This additional Rs.5 gain (100-95) over 5 years adds 1% to the yield.

Thus, for 667GS2035 purchased in 2022 to provide a yield of 6.89%,
a reduced subscription price is necessary,
which will result in…

  • a slightly higher effective rate of interest on the reduced subscription price.
  • additional returns generated on maturity (diff between the reduced subscription-price and face-value).

bond-yield-calculation

…the 667GS2035 being estimated to be subscribed at Rs.98.48 implies an Indicative Yield of 6.89%.

Since, 667GS2035 is traded on the secondary market too (NSE),
let us quickly take at peek at what it is currently trading at…

Rs. 97.99. Hmmm…
That means if one purchased this bond on NSE today at the market-rate,
the effective yield one would receive would be…

(6.67 * (100 / 97.99)) + ((100 - 97.99) / (2035 -2022)) = 6.96% :wink:

The limiting factor to invest in this bond at 6.96% yield in this case,
would be the trade volume of this bond on the NSE.
( <100 units traded on most days of the month, and ~6500 units traded today)


To answer your question,

is this indicative is the highest i am going to get? or it might be higher also?

It can be higher or lower, depending on the actual participation of folks who bid for the bond till the close-date.

7 Likes

is it wise to invest now? issue is closing tomorrow.

is it floating rate? will this have impact of raising interest rate?

@cvs

None of this is floating rate. All will pay fixed coupon as indicated in name, on FV.
If you intend to hold it till maturity, rising rate will not have any impact. If you plan to sell in between, interest rate movement will affect the price, resulting in loss (or gain) depending on where the rate is headed.

Regarding wise to invest, depends on your use case. But, unless you are in very low tax bracket, holding direct Gsec is not very tax efficient. a debt MF investing in Gsec or a target Maturity fund like Bharat Bond would be a better choice.

To get any benefit from bonds, the purchase price has to be below Rs100 and the lowest if possible right?

what about these Gsecs, the lower circuit 99.76 and 103.59 respectively. Notice the upper circuit is 105.01 and 114.49

Is there any benefit if i bid for say 103 ?

No.
Irrespective of what you pay for the bond,
you get periodic dividends (as per the coupon-rate and face-value) of the bond.

Yes.

  • Every six months as per the date of maturity of the bond,
    you will receive Rs.5.090 (on 1018GS2026) and Rs. 4.575 (on 915GS2024).

  • Rs.100 upon maturity of the bond in 2026 or 2024 respectively.
    or whatever you sell the bond for on the market before its maturity date.

1 Like

There is no way i can bid it below 100 for these, so the next best thing to do is probably exit it at cost price 1 or 2 quarter before maturity ?

Well, the lowest bid one can place on the exchange is the lower-circuit limit, yes.

Why will anyone buy these bonds at this price at that point of time?
Someone might buy if the prevalent interest rates at that time are relatively very low.
But, in that scenario you would prefer to hold the bond to maturity,
and receive the final installment of the dividend yourself.

Also, if you look at the trade history/volumes of these 2 bonds,
you will notice that these 2 bonds are hardly ever traded on the exchange;
even when traded occasionally in some month, they are in minuscule quantities.

In an interest rate rising regime the premium of the existing bonds will fall.

So if the RBI hikes rate say 50bps in Aug, the 754GS2036 now trading for 101 may drop to 99 or 98 (say for an example)

So wouldnt it be a good time to keep acquiring the same at a discount?

Or do you suggest some other bond, maybe one with an higher interest yield say 833GS… will start generating liquidity.

Yes. That’s the way it usually works.

Regarding liquidity, am not sure about why particular GSECs end-up being traded a lot.
There are often GSECs with similar yields or durations, one GSEC being freely traded in these secondary markets, whereas the others not at all.