How to Invest in Bonds: A Comprehensive Guide for Indian Investors

07 Nov, 20235 mins read
How to Invest in Bonds: A Comprehensive Guide for Indian Investors


Bonds, often referred to as fixed-income securities, are a fundamental component of any well-rounded investment portfolio. They play a crucial role in achieving financial goals, and understanding them is paramount for Indian investors. In this comprehensive guide, we will delve into the world of bonds, exploring what they are, how to invest in them, and why they are a vital investment option. We'll also compare bonds to fixed deposits (FDs), discuss strategies for bond investments, address taxation, and highlight potential risks and mitigation strategies. By the end, you'll have the knowledge and confidence to embark on your bond investment journey.

Understanding Bonds

  • What Are Bonds?
    Bonds are essentially loans made by investors to governments, corporations, or municipalities. These loans serve as a source of capital for the issuer. In return, investors receive periodic interest payments (coupon) and the return of their principal at maturity. We'll explore how bonds work, bridging the gap between borrowers and lenders.
  • Types of Bonds
    Bonds come in various forms, including government bonds, corporate bonds, municipal bonds, and more. Each type has distinct characteristics, risks, and returns. We'll dissect these differences, helping you understand the wide array of bond options available.
  • How to Buy Bonds
    Buying bonds in India involves navigation through primary and secondary markets. Here is a step by step guide to buy bonds in India:
  1. Open Demat Account
    To buy and hold bonds you need a Demat (Dematerialized) account. If you don’t have an active demat account you can open it via a registered financial institution such (either with a Bank or a SEBI registered securities broker). Also, make sure to link your demat account with your PAN Number for taxation purposes and complete your KYC.
  2. Select the type of bonds
    Determine the type of bond you would want to invest in. There are different types of bonds - government bonds, corporate bonds, municipal bonds or specialized bonds.
  3. Choose your Investment Route
    A. Primary Market: For government bonds and new corporate bond issues, you can participate in the auction and or subscribe to the public offering directly through banks or other financial institutions.
    B. Secondary Market: To buy bonds that are already in circulation you can buy them from the stock exchange, online trading platforms, or bond dealers.

Where to Buy Bonds?

  1. Using Stock Exchange
    Bonds are traded via Indian Stock Exchanges like the Bombay Stock Exchange (BSE) or the National Stock Exchange (NSE). Here’s how to buy bonds on Exchanges:
    A. Select a Broker: Open a trading account with a registered stockbroker. Ensure your broker has access to the bond market.
    B. Place Order: Log in to your trading account and place buy orders for the specific bonds you wish to purchase
    C. Monitor and Confirm: Keep an eye on your order status, and once the order is executed, you will receive a confirmation.
  2. Online Trading Platform:
    Some online trading platforms offer access to the bond market. You can choose a platform, create an account, and follow their process to buy bonds online.
  3. Direct from Issuers:
    In some cases, you may be able to buy bonds directly from the issuing entity. This is common for corporate bonds and municipal bonds.
  4. RBI Retail Direct:
    The Reserve Bank of India has recently started an online digital platform for retail individual investors to directly invest in government securities. Retail investors can open and maintain the “Retail Direct Gilt Account (RDG)” with RBI and actively participate in both primary issuances as well as open market (secondary sales) through the online facility.
  5. FD vs. Bonds: A Comparison


Fixed Deposits (FDs)



Banks and financial institutions

Government, corporations, municipalities, and other entities


Fixed and guaranteed returns, typically annual interest payments

Variable returns with fixed or floating interest rates, periodic coupon payments


Less liquid with predetermined lock-in periods

Better liquidity, tradable on secondary markets


Considered safe with insurance coverage up to Rs. 5 lakhs per account

Safety depends on issuer's creditworthiness, government bonds generally safest


Minimal risk, suitable for conservative investors

Varying degrees of risk, including credit risk, interest rate risk, and liquidity risk


Interest income taxable, TDS may apply

Tax treatment varies based on bond type

Advantages and Disadvantages

Advantages of FDs

Advantages of Bonds

Simplicity and ease of understanding

Diversification opportunities across bond types

Assured returns with minimal risk

Potential for higher returns, especially with corporate bonds

Ideal for short-term goals and emergency funds

Greater liquidity in secondary markets

Suitable for both short-term and long-term goals

Disadvantages of FDs

Disadvantages of Bonds

Limited potential for higher returns

Subject to credit risk, particularly with corporate bonds

Fixed returns may not keep pace with inflation

Interest rate movements can affect bond prices

Interest income is taxable, impacting post-tax returns

Returns may not be guaranteed, especially with market-linked bonds

Taxation of Bonds in India

Tax is applicable in Bonds majorly but some bonds are tax-free. Here are some key tax considerations:

A. Interest Income: The interest income you receive from bonds is subject to taxation. The tax rate on this income depends on your income slab and is added to your total income for the year.

B. Tax Deducted at Source (TDS): In many cases, issuers deduct TDS on interest payments at the time of credit. You can claim a refund if your total taxable income is below the taxable threshold. However, if you fall under a higher tax bracket, you may need to pay additional taxes on the interest income.

C. Capital Gains: If you sell a bond before maturity and earn a profit, it is considered a capital gain. Capital gains on bonds can be classified as short-term or long-term based on the holding period. The tax rate on these gains also depends on the duration of the holding.

D. Tax-Efficient Bonds: Some bonds, such as Tax-Free Bonds issued by certain government entities, offer tax benefits. Interest income from these bonds may be tax-free, making them attractive for tax-conscious investors.

E. Tax-Deferred Bonds: Certain bonds offer tax deferral benefits. For example, the interest income on National Savings Certificates (NSCs) is not taxed annually but is instead considered income at the time of maturity.

How Stack Helps You to buys Bonds?

Investing in bonds can be an uphill task, especially when faced with a selection from 1000s of options. At Stack Wealth, we understand the importance of simplifying the investment process and ensuring that you make informed decisions. Here's how Stack Wealth assists you in buying bonds:

Careful Selection for Your Unique Needs
With thousands of bond options, it's crucial to pinpoint the investments that align with your financial goals and risk tolerance. At Stack Wealth, we cut through the noise by meticulously curating a selection of bonds tailored to your specific requirements.

Whether you have short-term or long-term investment goals, or you're working with a particular budget, we take these factors into account to offer you bonds that make the most sense for your financial situation.

SABoR: Bond Analysis Tool
One of our standout features is SABoR, Stack's Analysis of Bond Risk, which is our proprietary bond analysis tool. SABoR is designed to provide users with a comprehensive selection of bonds while taking into account their unique risk profile. SABoR uses the following data of a bond before suggesting it to a particular investor.
- Assessing the underlying Creditworthiness of the issuer of the Bond
- Analysing Duration Risk - impact of rising and falling interest rates on the valuation of bond prices
- Evaluating the structure of the bond

By aligning the risk score of a bond with your unique risk tolerance, we ensure that the bonds recommended to you are in sync with your financial objectives.

disclaimer: the information provided in this blog is for general informational purposes only. it should not be considered as personalised investment advice. each investor should do their due diligence before making any decision that may impact their financial situation and should have an investment strategy that reflects their risk profile and goals. the examples provided are for illustrative purposes. past performance does not guarantee future results. data shared from third parties is obtained from what are considered reliable sources; however, it cannot be guaranteed. any articles, daily news, analysis, and/or other information contained in the blog should not be relied upon for investment purposes. the content provided is neither an offer to sell nor purchase any security. opinions, news, research, analysis, prices, or other information contained on our blog services, or emailed to you, are provided as general market commentary. stack does not warrant that the information is accurate, reliable or complete. any third-party information provided does not reflect the views of stack. stack shall not be liable for any losses arising directly or indirectly from misuse of information. each decision as to whether a self-directed investment is appropriate or proper is an independent decision by the reader. all investing is subject to risk, including the possible loss of the money invested.

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