In India, the history of first borrowing goes back to 1867 for railway construction. Although, the interest rate of bonds varied in India from time to time. In 1857 it came down to 5%, later gradually falling to 4% in 1871. Apart from that, during the first world war, a rise in public debt was also encountered. 

Overview

Long time ago, in 1860, bonds announced their arrival in the world of finance. With time, they have become super popular with all sorts of types. But why, you ask? Well! Because of their irresistible cool features that everyone loves. They provide a steady stream of cash, ensuring investors receive their interest payments on time. It is like having a piggy bank that never runs out. They are like your money buddies and the best part? There’s a whole bunch of them, each with their own specialty. 

Without further ado, let’s get right into the blog of bonds and different types of bonds.

What Is a Bond?

In the world of finance, bonds are like special deals (agreement) where one party owes money to the other party. The one who owes the money is – the debtor – promising to pay back the borrowed amount. The borrowed sum of money is known as PRINCIPAL – to the bondholder when it matures, which is a specific future date. 

Oh, and there’s more – the debtor also agrees to pay interest, or as they call it, the coupon, over a specific period. The difference in the amount and timing of these payments leads us to different types of bonds. And guess what? The debtor often gives the interest at regular intervals, like annually or every six months.

In simpler terms, a bond is an agreement that allows someone to borrow money, helping in raising funds for their projects, or in the case of government bonds, to cover ongoing expenses.

Different types of bonds

Now it is safe to assume that you are well aware of the basics of bonds, but there is much more to the story. There are numerous types of bonds, each of them serving different purposes. Let’s dig deeper without wasting

1) Government bonds

Government bonds in India are just like giving a helping hand to state or the central governments, especially during the times of liquidity crisis for hefty projects such as roads and buildings. What’s on the table? What’s on the table? Well, they promise to repay the principal amount with the set interest, and it’s all set to happen on a particular date. These bonds are counted under the long-term investment category, known as government securities (G-Sec), lasting about 5 to 40 years.

Remember those state-government bonds we discussed earlier? They perfectly fit into this category too, going by the name State Development Loan. Initially, it was like an exclusive club for big-shot investors, but guess what? Now, even regular investors and small banks can get in and access government bonds. It’s a bit like putting your money into an account where you get a sweet little extra every six months – almost like a bonus for being a savvy saver.

2) Corporate bonds

These are types of loans that companies take from regular people like you, to fund projects or handle the company’s everyday costs. Let’s break it into a simpler way, when a person buys a bond, they are lending money to the company, which pays them back with extra money called interest. The company pays you back with a little extra, known as “interest.”

In India, there are different types of bonds of corporate based on factors like risk, connection to company ownership, and how well they handle interest payments. One can say that corporate bonds help carve a path or a way for them to support a company and earn a little extra money out of it.

3)Treasury bonds 

Let’s talk about Treasury bonds – the superheroes of safety in the bond world. Why? Because they come with the minimal to no risk. Let’s talk about Treasury bonds – the superheroes of safety in the bond world. Why? Because they come with minimal to no risk. When the government issues these bonds, you can rest easy because there’s zero chance of them not paying you back. But what’s the tenure? It is a solid ten to thirty years, and here’s the sweet part – they offer a fixed interest rate. This rate, of course, dances to the tune of the current market conditions. So, with Treasury bonds, it’s like a secure ride with the government at the wheel. No worries, just steady returns.

4) Municipal bonds

Let’s talk about the community champions of the financial world – municipal bonds. State and local governments use these funds for crucial works such as building schools or hospitals for the community. Here is the cool part! People who meet the criteria may earn a tax-free income from these bonds. But what’s the catch? The interest rate is usually lower compared to other bonds. It’s a bit a trade-off, but you are contributing for the good of your community!

5) High-yield bonds

Time to talk about high-yield bonds, also known as Junk Bonds. The speciality of these bonds are that they come with higher interest rates, but here’s the deal – with great returns come great risks. In comparison to safer investment-grade bonds, Junk bonds are a bit riskier due to their lower credit ratings. That means more interested investors, right! You’ll often find these bonds in the hands of startups or companies shouldering a hefty load of debt.

If broken down into simple terms, high-yield bonds are like risk-takers in the investment game. They’re open to more risk, but in return, there’s a chance for higher returns. It’s an appealing option for those who want to earn huge, even if there’s a higher chance that the issuer might struggle to pay back the debt.

6) Convertible Bonds

Let’s talk about the elephant in the room! Convertible bonds are like the chameleons of the investment world – combining both debt and equity features. In bookish terms, these are a type of hybrid security which starts off as a normal regular bond, which pays periodic interest.

But what sets it apart is the convertible feature. Bondholders can transform their bonds into a specific number of common stocks from the issuing company, within a predetermined time or under certain conditions. Once the bond is converted, you officially become the shareholders of the company.

Why do people dig convertible bonds? Well, they bring a sweet level of flexibility. Investors can select between the stability of debt and the growth potential of equity, as per the market conditions or their investment game plan. It’s like having the best of both worlds!

7) Zero-Coupon

The rebel of the bond world! Unlike regular traditional bonds that pay periodic or timely interest, zero coupon bonds don’t give any interest payment throughout its whole tenure. Instead, they are issued at a price lower than their face value that’s why they are also known as pure discount bonds. In simpler terms, it is initially sold at a discounted price to its face value.

Now you must be thinking about what good it does for normal people. The return on investment rolls in when the bond matures. That’s where the investor gets the face value of the bond which is usually higher than what they paid. The difference between purchase price and face value is the interest earned over the bond’s entire tenure.

8) Inflation-Linked

Inflation-linked bonds – the superheroes that shield your investments from the pesky impact of inflation. Basically, the government of the country issues these bonds. The interesting factor – both the main amount and the interest rate change or fluctuate on the basis of how much prices are going up. For example, if inflation goes up, the amount you invested and the interest also goes up with the inflation. This helps in protecting your money from losing its value and making sure that your investment aligns with the rising cost of living.

9) RBI Bonds

The cool bond- authorised by the RBI, specifically the FRSB (Floating Rate Saving Bonds) 2020 – also known as RBI taxable bonds. This bond has a lifespan of seven years during. The interest rate is not fixed but actually fluctuates on the basis of market conditions. FRSB adjusts and pays interest every six months rather than giving it on maturity.

10) Sovereign Gold Bonds

Now here comes one of the most popular bonds: GOLD BOND, these bonds came into play by the authority of the central government. It is mostly suitable for those who want to invest in gold but do not want to keep the gold in physical form, it’s like having something precious but not having to worry about it.

The plus point of this bond apart from not worrying about the gold is that the interest is tax-free!! Yes, whatever interest you will earn from this bond will be exempted from tax. Apart from all the different types of bonds, gold bonds are considered highly secured bonds as it is offered by the government. 

How To Invest In Different Types Of Bonds In India.

If you are thinking of investing in financial instruments or tools like bonds, you either trade in the primary market or in the secondary market. In the primary market, issuers first sell their bonds to investors to raise funds. On the other hand, in the secondary market, these tools or instruments are actively traded on exchanges. Generally, these types of bonds are considered less liquid and often held until maturity.

In today’s time, even small investors have easy access to purchase government bonds. Acquiring government bonds in India has become easier and more accessible through platforms such as brokers.

Limitations of Bonds

Despite the many cool features bonds offer, they also have some limitations. 

Interest Rate Risk

Usually when the interest rate touches the sky, bond prices tend to go down. This means that if an investor has to sell their bonds before the maturity period, they might end up selling them for less than what they paid. Risk becomes more significant when the overall interest rate gains a new rise.

Inflation risk

Although bonds provide a steady flow of income, inflation can degrade the value of that income over time. This means investors can face certain losses and may end up with less purchasing power.

Liquidity risk

Bonds can be difficult to sell sometimes, specifically if they are not traded frequently. It can be quite a problem for investors who must sell their bonds before maturity.

Conclusion

To conclude it, there are different types of bonds, though we have only covered10 of them, they give investors numerous options to manage their money. Understanding these bonds types can help investors to make safe and sound decisions in building strong and diverse investment plans to reap the benefits. However, it is crucial to understand the in-depth insights of the bonds you opt for and seek legal advice before making an investment. 

FAQ

A Comprehensive Guide to Retirement Planning for Seniors, those over the age of 60, typically face difficulties managing their finances. However, the Indian government has launched several programs to assist senior citizens in saving money and enjoying a comfortable lifestyle. The Senior Citizen Savings Scheme (SCSS) is one such plan. We’ll go through everything you need to know about retirement savings plans in this blog. 

People start looking for ways to ensure their financial future as they approach retirement age. Investing in retirement savings plans is one of the best methods for achieving this. These plans are thought to be safe investments for retirees because they offer high returns and tax benefits.

What is a Savings Plan for Senior Citizens? 

The Senior Citizen Savings Scheme, or SCSS for short, is a savings program exclusively intended for senior citizens that is supported by the government. Since its inception in 2004, the plan has become one of the most widely used retirement investment options. It is directed by the Reserve Bank of India (RBI) and it offers a high pace important to senior residents. 

Eligibility

To be eligible for this scheme, an individual must meet the following requirements: 

•Age: At a minimum, the candidate should be 60. 

•Citizenship: The program is intended for Indian citizens. 

•Investment: The scheme also allows people over 55 who have retired or selected VRS to invest. 

Features of the Interest Rate on the Senior Citizen Savings Scheme

The government changes the interest rate on the Senior Citizen Savings Scheme every quarter. As of April 1, 2023, the financing cost is 7.4% per annum. The maturity period is five years, and the interest is paid out quarterly. 

The Senior Citizen Savings Scheme is held for five years. After maturity, the account can be extended for an additional three years; however, the interest rate will be adjusted following the current market rate. 

Minimum and Maximum Investments in this Scheme requires a minimum investment of Rs. 1,000 The maximum amount that can be invested is 15 lakhs.

Premature Withdrawal: A penalty of 1.5% of the deposit will be deducted if the account is closed after one year but before two years have passed since it was opened. A penalty of one percent of the deposit will be deducted if the account is closed after two years but before the maturity date.

Benefits of the Senior Citizen Savings Scheme

The scheme offers the following advantages: 

a. High-Interest Rate The scheme has a higher interest rate than the majority of other savings plans, making it a popular investment choice for seniors. 

b. Guaranteed Returns The investor need not be concerned about market fluctuations because the government guarantees the investment’s returns. 

c. Tax Benefits Under Section 80C of the Income Tax Act of 1961, investments in the Senior Citizen Savings Scheme are eligible for tax benefits. 

How to Apply for the Senior Citizen Savings Scheme In India 

you can apply for the Senior Citizen Savings Scheme at any designated post office or authorized bank. A step-by-step guide on how to apply for the program is provided below: 

1. Go to the authorized bank or designated post office that is closest to you.

 2. Gather the Senior Citizen Savings Scheme application form.

3. Complete all required information. 

4. Include the necessary documentation, such as proof of identity, address, and age.

5. Apply, along with the investment amount and the necessary documents required.

Documents required 

Seven Documents Required for the Senior Citizen Savings Scheme The Senior Citizen Savings Scheme application requires the following documents: 

• Proof of Age: Any valid government-issued document, including a passport, Aadhaar card, voter ID card, or PAN card. 

• Address Records: Any valid government-issued document, including a passport, voter ID card, or Aadhaar card. 

• Proof of Identity: Passport, Voter ID card, Aadhaar card, PAN card, or any other valid government document. 

• Photographs: two pictures of the size of a passport.

Comparison with Other Investment Options

Due to its guaranteed returns and high-interest rates, the Senior Citizen Savings Scheme is a popular investment option for senior citizens. However, before deciding, it is essential to compare it to other investment options. Fixed deposits, mutual funds, and government bonds are a few other options for senior citizens to consider when making investments.

Conclusion

Senior Resident Reserve Funds Plan is a phenomenal venture choice for retired folks who need to get their monetary future. It is regarded as a secure investment and offers tax advantages and a fixed interest rate. However, before investing, it is essential to take into account the scheme’s risks

FAQs

INTRODUCTION

Tax planning and risk coverage are essential aspects of managing personal finances. By implementing smart strategies, individuals can save tax and protect themselves from life’s ongoing risks. In this article, we will explore various actions that can be taken to save tax and cover these risks effectively. 

Managing finances involves making informed decisions to optimize savings and protect against unforeseen events. By understanding the importance of tax savings and risk coverage, individuals can secure their financial well-being. Tax savings allow individuals to minimize their tax liabilities and keep more money in their pockets. These extra savings can be utilized to cover ongoing risks, such as medical emergencies, accidents, or unexpected financial setbacks.

INVEST IN TAX SAVING INSTRUMENTS

Investing in tax savings instruments helps you to save tax. Public Provident Fund (PPF), National Pension System (NPS), Equity-Linked Saving Scheme (ELSS), and so on are a few examples to save tax. They not only offer tax benefits but also offer a good return on investment. According to section 80C of the Income Tax Act, an individual can claim a deduction of up to 1.5 lakhs in a financial year just by investing in, such as PPF, ELSS, National Savings Certificate (NSC), Senior Citizens Savings Scheme (SCSS), etc. So, don’t forget to take advantage of these schemes and get the best out of them to save tax.

TYPES OF TAX SAVING INSTRUMENTS

1. ELSS – Equity-Linked Savings Scheme:

A type of mutual fund called the equity-linked savings scheme (ELSS) primarily invests in the stock market or equity. Investments of up to 1.5 lakhs done in ELSS plans are qualified for charge allowance under Segment 80C of the Annual Duty Act. It has a lock-in period of 3 years. However, the returns from the ELSS are subject to market risks.

2. PPF – Public Provident Funds:

The Public Provident Scheme is a well-liked way to save money on investments and taxes. To get started with this long-term savings and investment product, you must open a PPF account at the post office or designated public and private sector bank branches. The PPF account pays a fixed interest rate for contributions. These deposits are eligible for Section 80C deductions up to Rs 1.5 lakh per financial year. It is a savings scheme with a lock-in period of 15 years.

3. Tax-Saving Fixed Deposit (FD):

This is a type of fixed deposit that offers tax benefits to investors. One can invest up to Rs 1.5 lakh on tax benefit fixed deposit and are eligible for tax deductions under Section 80C of the Income Tax Act. It is easy to open and manage online through the official website of the banks, making it an even more convenient and likable option. 

Moreover, it has a low-risk investment option with a lock-in period of 5 years, making it a long-term investment plan. Tax-saving FDs are popular among investors who want a safe and secure investment option with tax benefits

4. Claim Deductions on Home Loans:

You can claim a deduction on both the principal and interest components of the loan if you take a home loan. Under section 80C, an individual is eligible for up to a Rs 1.5 lakh deduction on the principal components. While on the other hand, according to Section 24, the interest component of the home loan is eligible for deductions up to Rs. 2 lakhs.

5. Unit-Linked Insurance Plan (ULIP):

A unit-linked insurance plan (ULIP) is a form of insurance policy that provides insurance coverage and investment opportunities. A portion of the premium paid for ULIPs is invested in equity and debt instruments, delivering market-linked returns to the policyholder. Investments in ULIPs up to INR 1.5 lakh per year are tax deductible under Section 80C of the Income Tax Act. ULIPs can be acquired online through a variety of insurance portals. 

For taxpayers who want to combine insurance and investing benefits, ULIPs are a smart investment alternative. It provides insurance coverage and the possibility for significant returns, making it a convenient option for investors seeking a two-for-one deal.

6. Purchase Health Insurance:

Health insurance provides safety and financial protection against medical emergencies and helps to save tax. Under section 80D, individuals can claim up to Rs 25000 health insurance premiums paid for themselves and their families. And if you are a senior citizen, the deduction rate is even higher at Rs 50000.

BENEFITS OF TAX DEDUCTIONS AND CREDITS:

One of the most crucial ways to save tax is to take the benefits of tax deductions and credits. Deductions are expenses that can be subtracted from your taxable income, while credits are amounts that can be subtracted directly from your tax liability.

Some common deductions and credits include:

Charitable donations:

the deduction amount may vary depending on the charity type but can range from 50% to 100% of the donated amount. 

Retirement contributions:

PPF, NPS, and EPF qualify under section 80C. The tax deduction limit of Rs 1.5 lakh per financial year. You can reduce your taxable income and the taxes you owe by taking advantage of these deductions and credits.

Claim deduction for insurance premiums:

If you buy life insurance, you can deduct the premiums paid under Section 80C of the Income Tax Act. This not only lowers your tax liability but also gives financial security to your family in the event of your unexpected death.

PROTECTION FROM LIFE’S AND FAMILY’S ONGOING RISKS:

1. Buying Life Insurance:

Another way to save tax is to buy life insurance. Life insurance is beneficial not only in the long run but also when it comes to tax deductions. While the vast majority could do without pondering the chance of unforeseen occasions, it’s essential to be ready assuming that something occurs.

2. Take advantage of the National Pension Scheme (NPS):

The National Pension Scheme (NPS) is a retirement-focused investment instrument that lets you build a retirement fund while lowering your tax bill. Contributions made following Section 80D(1) of the Income Tax Act are eligible for tax deductions. In addition, the NPS provides investors with a variety of investment options and fund managers.

3. Investing in Disability Insurance:

Disability insurance is one more sort of protection one can put resources into. Disability insurance, for example, can provide financial protection in the event of an unexpected event. They might become ill or disabled as a result of unforeseen circumstances. This insurance may assist in generating income. It can cover clinical costs, lost pay, and different costs connected with the handicap.

4. Investing in Mutual Funds:

Mutual funds are an incredible method for arriving if you are searching for abundance creation. They provide liquidity, diversity, and expert management advantages. Additionally, there are various options available. This includes hybrid funds, equity funds, and debt funds, depending on your investment objectives and risk tolerance. 

Because they provide liquidity, it is simple to purchase and sell shares at any time and from any location. Investing in mutual funds in India has become progressively well-known now. Additionally, you can adjust it to your particular necessities and financial objectives.

CONCLUSION

Managing ongoing risks and saving tax requires a decent approach to personal finance. Creating a budget, and reviewing your insurance policy are always good moves forward. You can achieve financial security and peace of mind for yourself and your family with the right mindset and strategies. Investing in tax saving schemes and policies is a way to save money in the long run and secure your life.

FAQs