What are PSU Bonds? How it works, benefits & more

In recent years, Public Sector Undertakings or PSU bonds have gained significant attention from investors due to their attractive interest rates and close competition with traditional investment schemes. These bonds are issued by public sector companies that operate in a wide range of industries, such as energy, finance, telecommunications, and more. Find out more about PSU bonds and whether or not they make for a good investment for you.

What are PSU bonds?

PSU bonds are a type of debt security issued by government sector companies and undertakings that have a 51% or more share of the central or state governments. Since the government has more than half a share in these bonds, these securities are among the lowest rated in terms of risk in the bond category and can be ideal for conservative investors.

There are different types of PSU bonds, including fixed-rate bonds, floating-rate bonds, sovereign gold bonds, inflation-indexed bonds, zero-coupon bonds, and others.

To understand these bonds better, it is essential to know how they work.

How do PSU bonds work?

Bonds are a type of loan where you lend money to the issuing authority and receive interest income in return. When you invest in a PSU bond, you put money in a bond issued by public sector banks and other entities. The bond issuers use this money for their projects and offer you a fixed return in return at select intervals.

Let’s now move to the benefits of investing in these bonds.

Benefits of PSU bonds

• Low risk: The companies that issue these bonds are considered less risky than private companies. Moreover, as stated above, with at least half the share of the government, PSU bonds carry minimal risk and can offer stable financial growth.
• Stable income: PSU bonds typically offer fixed and regular interest payments, providing you with a steady income stream. This can be particularly beneficial if you rely on income from your investments to meet your financial needs, such as in retirement.
• Diversification: Diversifying your investment portfolio by adding a fixed-income component to it can help you lower risk. PSU bonds, passive debt funds, etc., are all suitable debt options that can help reduce overall portfolio risk and volatility.

Things to consider when investing in PSU bonds.

• PSU bonds are issued in the denomination of Rs. 1000.
• PSU bonds can have a maturity of 5 to ten years, making them an ideal long-term investment option.[1]
• You can trade PSU bonds with a Demat account or invest in mutual funds like the banking and PSU fund. This is a type of open-ended debt fund that invests 80% of its total assets in debt instruments of banks, public financial institutions, and PSUs.[2]

[1] https://www.bondsindia.com/psu-bonds.html

[2] https://www.sebi.gov.in/legal/circulars/oct-2017/categorization-and-rationalization-of-mutual-fund-schemes_36199.html

Essential considerations for debt mutual funds in India 

In March 2023, the Government of India announced a new amendment to the Finance Bill 2023. Before the announcement, gains from debt funds were subject to short-term and long-term capital gains tax. Gains earned from funds held for less than three years were taxed as per your income tax slab for the year. On the other hand, profits from funds held for more than three years were taxed at 20% with an indexation benefit.

Post the changes, all gains from debt funds with 35% or less of their assets in equities, irrespective of the holding period, will now be taxed at your income tax slab rate for the concerned year. There will also be no indexation benefit, which could earlier reduce the taxability by accounting for the change in the investment cost due to inflation.  

Conclusion

Investing in PSU bonds can offer several benefits, such as regular income, lower risk, diversification, etc. However, like all investments, there may be some risks involved, and you must carefully evaluate your investment goals before investing in PSU bonds. It is also essential to consider the two ways of investing in them – through a Demat account or in PSU bond mutual funds.  

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