State Development Loan Bonds

Central and State governments in India issue tradable bonds to finance their big-ticket projects. While the Central Government issues treasury bills and bonds, state governments issue the state development loans bonds (SDLs).

The Reserve Bank of India (RBI) regulates the sale of state and central government securities. However, the coupons or interest rates offered on the former’s securities are marginally higher than those issued by the latter.

This is why many investors prefer to invest in SDL bonds rather than Central government securities. Read on to learn more about the state development loan bonds, their notable features, and how to buy them.

Like the Central Government, state governments in India also operate based on a budget. When a government's total expenditure surpasses its revenue, it runs on a fiscal deficit, which indicates its total borrowing.

To finance this deficit, state governments issue SDL bonds. RBI conducts competitive bidding auctions to sell these securities. While the auctions are held in the primary market, they are traded in the secondary market.

These securities are typically issued in dematerialised form. However, you can also get them in physical form by submitting a special request. These are considered liquid investment options available if you wish to put in a lump-sum amount for the long term.

The following are some of the notable features of state development loans:

• While the issuer decides the tenor of this bond, SDL Bonds generally have a maturity period of 10 years

• The bonds can be traded on stock exchanges; however, RBI conducts its auctions only in the primary market

• You can get the face value of the bond at its maturity or sell it on the stock exchange before the tenor ends

• Various credit rating agencies allot ratings to these bonds based on the respective state’s financial health, which you can use to select the best-performing bond

Here are some of the perks you enjoy when you buy state development loan bonds.

• Liquidity

These bonds are considered liquid as you can buy and sell them on stock exchanges.

• Taxation Benefits

The tax on the interest earned from these bonds is calculated as per the Income Tax Act. However, TDS isn’t applicable.

• Minimal Risk

As these bonds come with a sovereign guarantee and are monitored by RBI, they are considered much safer than corporate bonds.

• Fixed Source of Income

The interest earned from these bonds creates a fixed source of income for investors as they receive it twice every year.

State development loan bonds are auctioned on the RBI-managed Negotiated Dealing System-Order Matching (NDS-OM). However, in order to buy from stock exchanges, you need to follow these simple steps:

• Step 1: Open a Demat account online or visit a Depository Participant (DP) to apply for it physically

• Step 2: To deal in any kind of government securities, you will need to select a broker registered with RBI

• Step 3: Complete your KYC formalities by furnishing the required documents like PAN card, Aadhaar card, proof of residence, etc.

• Step 4: Choose the bond in which you wish to invest in

• Step 5: The order will be settled after you make the payment for the purchase

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