Fixed Rate Bonds

Fixed rate bonds are a category of bonds wherein the interest or coupon payments remain fixed or unchanged till the maturity date. This interest is determined as a percentage of the face value of the bond. For example, a 7-year bond with a Rs 1 lakh face value and 8% annual coupon pays Rs 8,000 annually, returning the principal at the end regardless of market fluctuations.

In India, most government bonds are issued as fixed-rate bonds. For instance, Sovereign Gold Bonds (SGBs) are fixed-rate bonds. They provide a fixed coupon rate of 2.50% p.a. on the initial investment amount and interest payments are made at semi-annual intervals. The interest rate is fixed for the 8 year tenure, the capital value fluctuates based on the average closing price of 999 purity gold over the previous 3 business days as per the India Bullion and Jewellers Association Ltd (IBJA).

Investors can purchase fixed rate bonds issued by corporates through public issues or private placement. In a public issue, the issuer invites the general public to subscribe to its bonds, whereas private placements of bonds in India are usually offered to qualified institutional buyers and a select group of persons not exceeding 200 as per the Companies Act 2013.

Once a fixed rate bond is listed on a stock exchange, investors can also buy that bond directly from its existing investors (i.e., from the secondary market) through the stock exchange(s) at its prevailing market price.

Investors can also buy fixed-rate bonds through OBPP (Online Bond Platform Providers), conventional stock brokers and partner financial marketplaces like Paisabazaar.

Choosing between fixed and floating rate bonds depends on the investor’s risk appetite, interest income expectations, interest rate regime and capital appreciation.

The taxation on bonds in India varies based on the nature of the bonds, holding period and listing status.

The interest income and capital gains from fixed rate bonds are taxable as per the Income Tax Act. The interest income of the bond is taxed as per the investor’s slab rate. The tax implications on capital gains depend on how long an investor has held these bonds. Fixed rate bonds held for less than 12 months are considered short-term capital gains and are taxed as per the tax slab rate of the taxpayer. And, for listed fixed rate bonds held for more than 12 months, they are taxed at 12.5% (without indexation) under the long-term capital gains structure.