Direct Debt Instruments: Types, Where to Buy & Taxes
These are instruments where the investor lends money to a government, company or entity in exchange for interest and principal.
1) Government Securities (G-Secs)
Issued by the central government.
- Treasury Bills (T-Bills): 91/182/364 days, zero-coupon (issued at discount).
- Dated Government Securities: 5–40 year maturity, fixed coupon.
- Sovereign Green Bonds.
- State Development Loans (SDLs): issued by state governments.
Where to buy: RBI Retail Direct, NSE/BSE, through banks/brokers.
2) Corporate Bonds / Debentures
Issued by private or public companies.
- Secured and unsecured/subordinated bonds
- Perpetual bonds (no maturity, callable)
- Convertible debentures (convert to equity later)
- Non-convertible debentures (NCDs): listed or unlisted
Categories by risk
- AAA, AA, A, etc. (credit ratings)
- High-yield / junk bonds (lower rating, higher interest)
3) PSU Bonds
Issued by Public Sector Undertakings (e.g., NHAI, PFC, REC, IRFC). Often considered safer than corporate bonds but not sovereign-guaranteed.
4) Tax-Free Bonds
Issued by government-backed entities (e.g., IRFC, NHAI, PFC).
- Interest is tax-exempt under Section 10(15).
- Mostly listed and tradable in the secondary market.
5) Taxable Bonds
- RBI Floating Rate Savings Bonds (7-year).
- GOI special issues (e.g., legacy 8% Savings Bonds – discontinued).
6) Certificates of Deposit (CDs)
Issued by banks and select financial institutions.
- Short-term (7 days to 1 year for banks).
- Tradable in the money market.
- Generally higher interest than bank FDs; no premature withdrawal.
7) Commercial Papers (CPs)
Short-term unsecured debt issued by companies to fund working capital.
- 7 days to 1 year maturity.
- Higher risk than CDs (not backed by bank deposits).
8) Fixed Deposits (FDs) — Direct Corporate FDs
Direct lending to NBFCs/HFCs/corporates (e.g., Bajaj Finance, HDFC Ltd earlier).
- Typically higher rates than bank FDs.
- Higher default risk; check issuer rating and terms.
9) Masala Bonds
Rupee-denominated bonds issued in overseas markets by Indian entities; currency risk borne by the investor.
10) ECB / Foreign-Currency Bonds
Indian companies borrow in USD/EUR etc. Investors face currency plus credit risk.
11) P2P Lending Notes
Peer-to-peer platforms (e.g., Lendbox, Faircent): you lend to individuals/SMEs. Very high risk, unsecured.
12) Structured Debt Instruments
- Market-Linked Debentures (MLDs)
- Collateralised Loan Obligations (CLOs)
- Securitised Debt Instruments (SDIs)
- Credit-enhanced bonds
Typically for HNIs/institutions; complex risk/return.
13) Municipal Bonds
Issued by urban local bodies (e.g., Pune Municipal Corporation). Market is still small in India.
14) Infrastructure Bonds (Section 80CCF — old)
Earlier provided tax benefits; may revive under future policies.
Summary Table
| Instrument | Typical Tenor | Retail Access | Liquidity | Tax (Indicative) | Approx Yield (Broad) |
|---|---|---|---|---|---|
| Treasury Bills (T-Bills) | 91 / 182 / 364 days | NDS-OM Lite / NSE/BSE T-Bills / brokers | High | STCG @ slab (≤36m) | 6.5% – 7.5% |
| Government of India Bonds (G-Secs) | 1 – 40 years | RBI Retail Direct / brokers | High (on-the-run best) | Interest @ slab; capital gains per holding | 6.8% – 7.8% |
| State Development Loans (SDLs) | 3 – 20 years | RBI Retail Direct / brokers | Moderate–High | Interest @ slab; capital gains per holding | 7.0% – 8.2% |
| PSU / AAA Corporate Bonds | 2 – 15 years | Brokers / exchanges | Moderate | Interest @ slab; capital gains per holding | 7.3% – 8.3% |
| NCDs (Public / Listed) | 12m – 10 years | Primary (public issues) / secondary | Issue-specific | Interest @ slab; capital gains per holding | 8.0% – 9.5% |
| Lower-rated NCDs (A/BBB) | 2 – 7 years | Primary / secondary | Lower | Interest @ slab; capital gains per holding | 9.5% – 12%+ |
| Tax-free Bonds (old issues) | Residual 5 – 10+ years | Secondary only | Moderate | Coupon tax-free; CGT on sale | 5.0% – 6.5% (tax-free) |
| RBI Floating Rate Savings Bonds (Taxable) | 7 years (non-tradeable) | Banks / RBI agents | Lock-in; no secondary | Interest @ slab | ~7.0% – 8.5% (resets) |
| Bank AT1 Perpetuals (high risk) | Perpetual (issuer call) | Secondary via brokers | Issue-specific | Interest @ slab; CGT on sale | 8.0% – 12%+ |
| Sovereign Gold Bonds (SGBs) | 8 years (exit from 5th) | Primary / secondary | Moderate | 2.5% coupon @ slab; redemption gains exempt | 2.5% coupon + gold price |
Risk labels are indicative only. Always review credit ratings, covenants, liquidity and taxation.
Retail Availability & Where to Buy
| Instrument | Retail Access | Typical Platforms / Routes |
|---|---|---|
| G-Secs / T-Bills / SDLs | Yes Easy | RBI Retail Direct, NSE/BSE (primary & secondary), many brokers and banks |
| Corporate Bonds / NCDs | Yes | Exchange listings via stock brokers, public NCD issues, debt desks of brokers |
| PSU Bonds / Tax-Free Bonds | Yes (mostly secondary) | NSE/BSE through brokers; occasional primary issues |
| Certificates of Deposit (CDs) | Limited | Money market desks / select brokers (primary usually non-retail) |
| Commercial Papers (CPs) | Usually No (retail) | Institutional desks; sometimes via broker placements to HNIs |
| Corporate FDs | Yes | Issuer websites, NBFC/HFC branches, brokers & online FD platforms |
| Masala / ECB Bonds | Limited | International exchanges via global brokerage accounts; higher ticket sizes |
| P2P Lending Notes | Yes | Registered P2P platforms (e.g., Faircent, Lendbox) |
| Structured Debt (MLDs, SDIs, CLOs) | HNIs / Eligible clients | Brokers/wealth desks; suitability & ticket-size conditions apply |
| Municipal Bonds | Yes (occasionally) | NSE/BSE during issues and in secondary market; availability varies |
Platform access varies by issue and broker. Minimum investment, KYC, lot sizes and liquidity differ across products.
Indicative Tax Treatment (Overview)
| Instrument | Interest Income | Capital Gains on Sale | TDS / Notes |
|---|---|---|---|
| G-Secs / SDLs | Taxed at slab | Depends on holding & listing status; verify current rules | TDS typically not deducted on exchange trades; check with broker |
| Corporate / PSU / Taxable Bonds | Taxed at slab | Listed vs unlisted holding periods differ; rates vary—confirm current provisions | Issuer may deduct TDS on interest; PAN/KYC required |
| Tax-Free Bonds | Exempt u/s 10(15) | Capital gains taxation applies on sale as per prevailing law | Book-entry interest usually without TDS; verify with DP/broker |
| Corporate FDs | Taxed at slab | Premature exit penalties; no market sale | TDS applicable above thresholds |
| CDs / CPs | Taxed at slab (discount income) | If traded, gains taxed as per listing/holding rules | Primarily institutional; retail treatment varies |
| Masala / ECB (Foreign-currency) | Taxed per Indian law; FX adjustments may apply | Capital gains + FX impact; overseas rules possible | Cross-border tax rules—seek advice |
| P2P Lending | Interest taxed at slab | No market sale; recoveries/write-offs per platform rules | TDS policies vary by platform |
| Structured Debt (MLDs/SDIs) | Coupon/return taxation per product terms | Payoff-linked rules differ; confirm before investing | Often HNI-only; ticket size & suitability norms |
FAQ
What is a direct debt instrument?
It is a product where you lend money directly to a government, company or entity and receive interest and principal back. Examples: government securities, corporate bonds, CDs, CPs, etc.
How is direct debt different from debt mutual funds?
In direct debt you hold the instrument itself; in mutual funds a professional manager holds a diversified portfolio on your behalf and you own fund units.
What are the key risks in direct debt?
Credit/default risk, interest-rate risk (price moves with yields), liquidity risk (ability to sell), and for foreign-currency bonds, exchange-rate risk.
Related reading
Prefer a simpler route? Compare with debt mutual funds, or learn how compounding and the Rule of 72 work.
Education only. Product features, platform access and taxation can change—always confirm current rules with your broker, platform and tax advisor.