*What is Gilt? *Gilt or G-Sec are instruments issued by the Reserve
Bank of India (RBI) on behalf of the government and include central
and state government securities, as well as short-term treasury bills
issued as part of the central bank's open market operations. **
*How can we invest? -Gilt Mutual Funds *Retail investors can take
exposure to Govt. bonds through Gilt funds - mutual funds that invest
in G-Secs and money market instruments. Over the past one year,
medium- and long-term gilt funds have been the best performing
category among debt funds. Some top-rated gilt funds are giving a
return of over 20 per cent.
*What are the risks when investing in Gilts? *On any fixed income
investment (Gilt, Corporate bond, or Fixed Deposit in a bank) there
are three types of risks - Credit risk, Liquidity risk and Interest
rate risk.
G-Sec has practically zero credit risk (guaranteed by Govt.) and good
liquidity. However, they do have interest rate sensitivity like any
other fixed instrument - there is an inverse relationship between
interest rates and prices of securities. Therefore, if the interest
rate goes down, the prices of bonds rise and vice versa. Interests on
these bonds are normally paid semi-annually on the face value, and are
one of the sources of earning from these papers.
*Gilt Mutual Funds – Tax efficient than FDs *Gilt funds get the same
treatment as debt funds and are thus, eligible for the benefit of
indexation on capital appreciation. Dividend received, if any, is
chargeable to tax at 14.16% (12.5% + 10% surcharge + 3% education
cess). In bank FDs, one has to pay tax on the interest earned at the
end of a financial year even if the interest would be paid at a later
date, or maybe years later. For example -you have made an FD of Rs
50,000 for four years. You will have to pay tax on the liable interest
for all the financial years it spans, even though the interest amount
would come into your hands only at the end of the four-year tenure.
Also, if the interest on a particular fixed deposit exceeds Rs 10,000,
you would be liable to tax deduction at source (TDS), which is
applicable per financial year. The bank will compute your interest and
will deduct an amount equivalent to the tax, if any, by making
adjustments in the FD amount.