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Bonds and Debentures in India

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Bonds and Debentures in India

Bonds and debentures are fixed income instruments which are taken by investors looking for regular fixed income through payment of interest on the principal purchase.

 

Bonds and debentures are debt instruments with different types of exposure. In general terms bondholders are secured by access to the underlying asset in case of default by the issuer. Debentures, on the other hand, are unsecured, and debenture holders do not have recourse to assets in the case of default by the debenture issuer.

 

Infrastructure Bond
Infrastructure plays an instrumental role in the economic development of a country. Majority of the infrastructure development projects are carried out under the aegis of the government. However, there have been many viable infrastructure projects which have not been undertaken for the paucity of funds. The government started issuing bonds to mobilize funds for such projects. An Infrastructure bond is usually floated by governments, infrastructure financing companies etc to raise funds which will be used in the development of infrastructure in a country. The bonds carry tax advantages which enable funding of the projects at lower interest rates. An investor can save taxes on investments up to Rs. 20, 000 over and above the Rs. 1,00,000 exemptions applicable under section 80C.

 

GOI/RBI Bond
They are also known as Government of India Bonds. Though there is no tax benefit, but these bonds offer guaranteed returns. The tenure is six years. You can borrow against these bonds. Premature withdrawal is not allowed for the first three years.

 

Section 54 EC/Capital Gains Tax Exemption Bond
As per provisions of Income Tax Act, 1961, any long term capital gains arising from transfer of any capital asset would be exempt from tax under section 54EC of the Act if:

  • The entire capital gain realized is invested within 6 months of the date of transfer in eligible bonds
  • Such investment is held for 3 years
  • To avail of capital gain exemption, the bonds so acquired cannot be transferred or converted into money or any loan or advance can be taken on security of such bond within 3 years from date of acquisition else, the benefit would be withdrawn
  • If the amount invested in bonds is less than the capital gains realized, only proportionate capital gains would be exempt from tax.

Currently, one can invest into bonds issued by Rural Electrification Corporation Ltd and National Highways Authority of India and save capital gains tax under section 54 EC. The yield is 6% per annum and the lock in period is for three years. Maximum investment allowed across two bonds is ₹50 Lakhs.

 

Debentures
A
debenture is a debt instrument issued by corporate to borrow money. The debenture holder is entitled to a fixed rate of interest on the money he/she invests in the debentures. The money raised by the company through debentures becomes part of the company's capital but does not get added to the share capital of the company.

Debentures are traded in the market generally at a discount. Debenture holders have no rights to vote in the company's general meetings of shareholders. The interest paid to debenture holders is a charge against profit in the company's books of accounts.

 

There are two types of debentures:

1) Convertible debentures
Debentures issued by the company which are convertible into equity shares after a fixed period of time are called convertible debentures. Convertible debentures are more attractive to buyers. Generally convertible debentures are issued at a lower interest rates compared to non convertible debentures.

 

2) Non-convertible debentures
These debentures cannot be converted into equity shares of the company. They generally carry higher rate of interest compared to convertible debentures.

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