Public Sector Undertakings (PSU) Bonds

Public Sector Undertaking (PSU) bonds are fixed-income instruments issued by government-owned companies to raise funds for infrastructure, development, or operational needs, among other reasons. These bonds offer investors the potential to earn regular interest while supporting government-backed enterprises. Owing to their sovereign association, PSU bonds are generally viewed as relatively stable investment options, making them suitable for investors seeking predictable returns and moderate risk exposure.

Table of contents

• What are PSU bonds?
• Types of PSU bonds
• How do PSU bonds work?
• Who should invest in PSU bonds?
• How to invest in PSU bonds
• Tax implications of PSU bonds

What are PSU bonds?

PSU bonds are debt securities issued by public sector undertakings (PSUs) in which the central or state governments own a greater than 51% stake. These bonds are an important source of financing for PSUs and offer investors a relatively stable investment avenue backed by the government. Additionally, the PSU bond definition states that they are issued with maturity periods ranging between 5-10 years, making them suitable for investors with a medium to long-term horizon.

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Types of PSU bonds

There are several forms of PSU bonds, including:

• Fixed-rate bonds
• Floating-rate bonds
• Inflation-indexed bonds
• Zero-coupon bonds

How do PSU bonds work?

Investing in PSU bonds is like lending money to government-backed firms. These firms (PSUs) use your money for projects and business development and repay the investors with an interest.

Potential advantages of investing in PSU bonds:

There are various advantages of investing in PSU bonds. Some of them are mentioned below:

• Return potential: PSU bonds offer fixed and regular interest payments making them suitable for investors seeking a relatively steady income.
• Relatively low risk of default: Government backing of PSUs ensures that the risk of default on interest payments and principal repayment is minimal.
• Diversification: Investing in fixed-income securities like PSU bonds can enhance portfolio diversification and mitigate the overall risk.
• Tax efficiency: Certain PSU bonds are tax-free wherein the interest generated is exempted from taxation.

Read Also: Bond Market: Meaning, Rates, Features and Its Types

Who should invest in PSU bonds?

Investing in PSU bonds can be suitable for:

• Risk-averse investors: Investors seeking relative stability of the principal and potentially regular interest payments may consider PSU bond funds.
• Diversification: Allocating a part of your portfolio to fixed-income instruments can offer overall risk mitigation.
• Income seekers: Investors planning for retirement or those seeking a potentially steady income can consider PSU bond funds.
• Extended horizon: Since PSU bonds are issued with maturities between 5-10 years, they can be suitable for investors with a medium-to-long term horizon. Investors can also invest in PSU bonds through debt mutual funds, such as Banking and PSU funds. Those considering a Systematic Investment Plan in such a scheme can consider taking the help of a monthly SIP calculator to plan their investment approach. The calculator estimates the potential future value of your monthly contributions based on your SIP amount, tenure and expected returns.

How to invest in PSU bonds

To invest in PSU bonds, investors may consider the following methods:

• Through stock exchanges: PSU bonds are listed on exchanges like NSE and BSE and can be purchased through a demat and trading account.
• Through primary issues: Investors may subscribe to new bond issues when they are offered in the primary market.
• Through mutual funds: Debt mutual funds, especially those investing in government or PSU bonds, provide indirect exposure to fixed income securities.

The process may involve selecting a suitable bond issue, completing the KYC process and application form and choosing the investment tenure.

PSU bonds offer the potential for relatively stable returns and may suit investors seeking fixed-income instruments with government backing. Monitoring interest payouts and maturity dates may help in planning cash flow effectively.

Tax implications of PSU bonds

The tax implications of Public Sector Undertaking (PSU) bonds depend on whether the bonds are listed or unlisted, the holding period, and the investor’s income tax bracket.

Interest income:

The interest earned on PSU bonds is taxable under the head ‘Income from other sources’ and added to the investor’s total income. It is taxed according to the investor’s applicable income tax slab rate.

Capital gains tax:

Listed PSU bonds: If held for 12 months or less, the gains are treated as short-term capital gains (STCG) and taxed as per the investor’s income tax slab. If held for more than 12 months, the gains qualify as long-term capital gains (LTCG) and are taxed at 10% without indexation.

Unlisted PSU bonds: As per latest norms, capital gains from all unlisted taxable bonds are taxed as per the investor’s applicable income tax slab, regardless of the holding period.

Investors may consider consulting a tax professional for clarity and updated tax rules.

Conclusion

Investing in PSU bonds may provide a potentially stable, fixed-income option for those seeking predictable returns. Considering factors such as interest rates, tenure, liquidity, and tax implications may help investors decide whether PSU bonds align with their financial objectives. Before investing, investors should review factors such as credit ratings, tenure, coupon rates, and taxation to understand the potential risks and returns. Listed PSU bonds also provide tradability on exchanges, offering flexibility for those who may wish to exit before maturity. Careful evaluation may support better planning and more informed investment decisions.

FAQs:

What are PSU bonds and how do they work?

PSU bonds are fixed-income instruments issued by government-owned companies, offering the potential for periodic interest and repayment of principal at maturity.

Who issues PSU bonds in India?

PSU bonds are issued by Public Sector Undertakings (PSUs), where the majority stake is held by the Government of India or state governments.

What are the types of PSU bonds available?

Common types include regular bonds, tax-saving bonds, and special schemes with varied tenures and interest structures.

What are the key benefits of investing in PSU bonds?

PSU bonds offer the potential relatively stable returns or interest income. They may also come with lower default risk compared to private issuers due to government backing. Some PSU bonds also offer some tax advantages.

How to invest in PSU bonds?

Investors may buy PSU bonds during public issues or from the secondary market through demat accounts or online trading platforms. Some bonds are listed on stock exchanges.

Are PSU bonds safe investments?

While PSU bonds are generally perceived as relatively stable due to government ownership, they are not entirely risk-free. Factors such as credit rating, interest rate fluctuations, and liquidity can affect returns. Investors should review the issuing PSU’s financials and the bond’s rating before investing.

Can PSU bonds be sold before maturity?

Some PSU bonds may allow early exit through secondary markets, but others may require holding until maturity.

What is the tax treatment on interest earned from PSU bonds?

Interest income is taxed as per your income slab.

What is the typical maturity period of PSU bonds?

Maturity periods can vary significantly depending on the bond issue and scheme. For instance, some bonds may have a 5-year maturity while some may have longer tenures such as 10 or 15 years.