What Are Bonds and Different Types of Bonds

A bond is a financial instrument that is offered as a security to loans offered to an investor that is issued by a government or corporate entity. It bears a fixed repayment with a certain rate of interest the maturity or expiry of the due date to the investor.

Difference Between Bonds and Shares

The major difference between the bond and shares are

1. Shareholders have an equity stake in a company which means that they hold ownership in the company, whereas bondholders are the creditor of the company, and the company is obliged to pay off them on a priority basis over shareholders.
2. Bonds are made up for a definite period or till the time of maturity, whereas stocks typically remain outstanding till the time of bankruptcy.

Types Of Bonds

• Fixed Coupon Rate Bonds: These types of bonds are issued where the rate of interest is fixed from the date of issue. The interest provided on these bonds are annually, semi-annually, quarterly, or monthly till the date of redemption.
• Floating Coupon Rate Bonds: These bonds rate fluctuates at a predefined time till the date of maturity. The interest rate provided on these bonds depends on a benchmark that it follows to determine the coupon rate in each payment.
• Zero-Coupon Bonds: These bonds are the bonds where no payments are made to the holder till the date of maturity. Here the bonds are issued below the face value amount and remain the same on the date of redemption or maturity. The difference between the redemption price and the issue price is the return for an investor. In India, T-Bills are the Zero-Coupon Bonds.
• Cumulative Coupon Rate Bonds: These bonds are issued with a coupon rate, but the payment is done at the time of redemption. Usually, corporations issue these types of bonds.
• Inflation Indexed Bonds: These bonds issued by the government remains ineffective from the inflation rate. Usually, the coupon rate equals the inflation rate and the additional rate provided over the inflation rate.
• Sovereign Gold Bonds: Sovereign gold bonds (SGBs) are government securities that are denominated in grams of gold. These are used as substitutes for holding physical gold. The Bond is issued by the Reserve Bank of India on behalf of the Government of India where the redemption price of bonds depends on the price of gold as per the IBJA Rate. Interest calculated on these bonds depends on the face value amount which is 2.5% per annum.
• Tax-free bonds: Bonds issued by government Companies such as Indian Railways Finance Corporation, the National Highways Association of India (NHAI), National Hydroelectric Power Corporation (NHPC), HUDCO, Rural Electrification Corporation (REC), etc. The interest earned on these bonds is completely tax free under section 10 of ITA.

Period Of Redemption of Bonds

Usually, the tenure of bond redemption of bonds in India is 8 years. However, several bonds such as gold bonds can be redeemed after the fifth year from the date of issue on coupon payment dates. The bond will be tradable on Exchanges, if held in DEMAT form or can be redeemed in any other form depending upon the nature of the bond.

Taxability Of Bonds

Bonds issued by the government are completely tax-free under section 10 of ITA. However, the profit you get after selling is taxable as per your income tax slab under Section 112.  Also, trading of bonds after one year will attract a long-term capital gains tax of 10%, and there is no benefit of indexation provided on the sale of these bonds.