How can retail investors buy RBI bonds and where?

The Reserve Bank of India (RBI) recently provided retail investors - a direct portal and easy access to bonds primarily treasury bills, government bonds, state development loans and sovereign gold bonds (SGBs) through “Retail Direct Scheme” (RDS).

How can retail investors buy RBI bonds and where?

RBI Retail Direct Scheme enable retail investors to invest directly in government securities and bonds

The bond market in India was always dominated by the institutional players such as banks, financial institutions, mutual funds, provident and pension funds, corporates and foreign portfolio investors (FPIs). Retail investors used to invest in bank fixed deposit, Public Provident Fund (PPF), debt mutual funds and insurance schemes to take exposure in the debt instruments. The Reserve Bank of India (RBI) recently provided retail investors - a direct portal and easy access to bonds primarily treasury bills, government bonds, state development loans and sovereign gold bonds (SGBs) through “Retail Direct Scheme” (RDS). The scheme was launched on November 12, 2021 with an objective of bringing bond market within reach of the common man by simplifying the investment process. Investors can open and maintain a ‘Retail Direct Gilt (RDG) Account’ on a special portal - https://www.rbiretaildirect.org.in/  wherein they can invest in primary issuance of g-secs and in secondary market through NDS-OM which is RBI’s Negotiated Dealing System Order Matching trade platform.  Before getting into details of these two let’s see what are the merits of the new RDS, the eligibility criteria and registration process to open the account.

Benefits of investing in the RBI retail direct scheme:

Eligibility:

To open the RDG account, retail investors need to have savings bank account, a Permanent Account Number (PAN) issued by the Income Tax Department or another other valid KYC document, valid email id and registered mobile number. Only one account can be opened. The account can be opened singly or jointly with another retail investor who meets the eligibility criteria.  Non-Resident retail investors (NRIs) eligible to invest in G-secs under Foreign Exchange Management Act, 1999 can also open the account.  

Steps for the registration of the RDG account:

  • Registration on the online portal - https://www.rbiretaildirect.org.in/ can be done by filling up the online form and use the OTP received on the registered mobile number and email id to authenticate and submit the form.
  • Investors need to submit and keep the valid KYC documents and keep them updated from time to time. Linking of the bank account to the RDG account can be done by uploading of the cancelled cheque.
  • Once is registration is completed, the details for accessing the RDG account will be conveyed through SMS/e-mail
  • Investors also get investor services like the transaction history, balance position of the securities holdings, transaction alert through email/SMS, nomination facility wherein maximum two individuals can be nominated, securities available for pledge or a lien. They can also gift g-secs to other RDG investors and also raise any query/grievance on the portal which will be resolved by the Public Debt Office (PDO) Mumbai, RBI.
  • The RDG account is opened and maintained with the RBI free of cost.

Type of investment options:

Once the RDG account is opened investors can make the investments in the following manner:

For the primary market participation

Investors can place a bid on the online portal and allotment of the g-secs will be as per the non-competitive scheme. The non-competitive bidding means bidder would be able to participate in the auctions of dated g-secs without having to quote the yield or price in the bid. Hence, not to worry about whether his bid will be on or off-the-mark; as long as he bids in accordance with the scheme, he will be allotted securities fully or partially. This will be good opportunity to retail investors who do not have the expertise to bid competitively in the auctions and will also have the fair chance. Auction of the g-secs will be notified by the government of India. The cut off price or the coupon is then announced by RBI on the basis of the bids received. All successful bidders will be allotted the security auctioned either in full or in part. Only single bid can be placed, the minimum bidding amount is Rs 10,000 and multiples thereof. Payment can be made through net banking/UPI facility. Allotted securities will be credited to the investors RDG account within five working days from the date of the auction.

For the Sovereign gold bonds issuance investors need to follow the procedural guidelines. They can also refer to FAQs - https://www.rbiretaildirect.org.in/#/FaqGoldBonds

Secondary market transaction can be done by the investors through NDS-OM retail portal - https://retail.ndsom.com/ which is an anonymous order driven electronic system, where participants can trade anonymously by placing their orders on the system or accepting the orders already placed by the other participants. Earlier access to NDS-OM system was provided only to the institutional participants like banks, primary dealers, NBFCs etc. NDS-OM will give access to all the central government, state g-secs and treasury bills like 91 days, 182 days and 364 days to the retail investors.  Other key features of the NDS-OM platform are real time information dissemination, T+ 1 trading from 9:00 am to 5:00 pm, separate order books for standard & odd lot markets and operational risk controls available.  All of these features will ensure transparency, efficient price discovery, lesser transaction time, anonymity, wider geographical coverage, better regulatory surveillance and level playing field.

Before placing the order, investors need to transfer funds to the designated account of CCIL (Clearing corporation of NDS-OM) using net-banking/UPI from the linked bank account before the start of the trading or during the day. At the end of the trading session if the excess funds are lying then that it will be credited to investors’ account.  In case of the sale transaction, the securities will be blocked at the time of the placing order till the settlement of the trade and funds will credited to the linked back account. 

Risk involved and risk mitigation:

The RDS offer ease of access and level playing field to the retail investors. While G-secs are risk free instrument as government will rarely default on their payments. But there is market risk i.e., evaluation of the potential mark-to-market losses, reinvestment risk and the liquidity aspect of the bonds that needs to evaluated before investing. Investors can mitigate the risk by holding the security till the maturity and rebalancing of the portfolio. Investors can refer to “G-secs Market- A primer’ published on the RBI website to understand various risks associated with g-secs.

Taxation aspect:

When it comes to investing in the retail bonds tax is levied on the interest earned and capital gains.

Interest received from the bonds is taxed similar to bank fixed deposits wherein interest income is added to investors’ income and taxed as per the applicable income tax bracket. For instance, if the pre-tax return is 6.5% and individual belongs to 20% tax bracket then the post-tax returns will be 5.20%.

Capital gains i.e., selling of the bonds before the maturity date in the secondary market will be classified on the basis of the holding period. Gains from the bonds sold within the period of 12 months are classified as short-term capital gains which are added to investor’s income and taxed as per the income tax slab of the investor. Long term capital gains tax is levied on the holding period of more than 12 months and are taxed at the rate of 10% (without indexation benefit).

Currently there are no tax benefits or any specific tax exemptions applicable to investment in the retail bonds. If the central bank brings in some tax benefit on the retail bonds it can further enhance the attractiveness of the investment avenue. Till then, RDS will be easy and direct medium for the retail investors to invest and trade in bonds.