Bonds and Debentures: Which Debt Security Fits Your Portfolio?

Highlights:

• As of March 2026, Central G-Secs outstanding were about ₹125.7 trillion and State Development Loans about ₹73 trillion.
• Corporate bonds outstanding reached about ₹59.1 lakh crore in FY26, still only ~16–17% of GDP.
• The 10-year G-Sec yield was near 6.95% in early September 2026; long AAA paper typically added 100 bps, AA 209 bps.
• Corporate fundraising in FY26 was ₹9.1 lakh crore, of which 98.8% came via private placements.
• Retail access: RBI Retail Direct (G-Secs/SDLs from ₹10,000); listed NCDs via demat on NSE/BSE under SEBI NCS Regulations, 2021 (notified on 20 January 2026).

Introduction

Both bonds and debentures pay a contractual coupon and return principal. In India, the label matters less than who issues the paper, whether it is secured, how easily it trades, and how the Income-tax Act treats interest versus capital gains.

What the Words Actually Mean in India

Under Section 2(30) of the Companies Act, 2013, “debenture” is the umbrella term for a company’s debt instrument, including bonds, whether or not a charge is created on assets. Money-market paper under Chapter III-D of the RBI Act (for example, commercial paper) is carved out.

Market practice is narrower. Government securities like Treasury Bills, dated G-Secs, Floating Rate Bonds and Sovereign Gold Bonds are issued by the Centre and managed by the RBI. State Development Loans (SDLs) are state government bonds with the same sovereign-state character but a yield pick-up over G-Secs. Corporate bonds and non-convertible debentures (NCDs) are issued by companies and PSUs and, if listed, sit under SEBI’s Issue and Listing of Non-Convertible Securities Regulations, 2021, last amended 21 January 2026.

So the investor question is not “bond or debenture” in the textbook US/UK sense. It is: sovereign curve or corporate credit?

Scale of the Two Markets

India’s sovereign book dwarfs corporate debt. ICRA estimated Central G-Secs at ₹125.7 trillion and SDLs at ₹73 trillion at end-March 2026. The Centre’s gross dated-security borrowings were ₹14.61 lakh crore in FY26; Budget 2026-27 pegs FY27 gross market borrowings at ₹17.2 lakh crore. States face a heavy refinancing wall: about ₹24 trillion of SDLs mature across FY28–FY32.

The corporate market has grown fast but remains thin versus peers. Outstanding corporate bonds were about ₹59.1 lakh crore in FY26 (roughly 17% of GDP), versus far higher ratios in Korea or Malaysia. SEBI data show mobilisation falling 8.4% to ₹9.1 lakh crore in FY26, the first drop in four years, while issue count rose to 1,967. Public issues were only ₹11,343 crore; 98.8% of money was raised privately. Banks, NBFCs and HFCs still account for about half of outstandings; AAA and AA paper is more than 85% of the book. Secondary turnover did improve: trades settled through clearing corporations rose 27.9% to ₹21.2 lakh crore in FY26.

How Risk and Return Actually Differ

G-Secs carry the Centre’s full faith and credit. They are the pricing benchmark. In early September 2026, the 10-year yield traded around 6.95% after a US-led sell-off; the curve still sloped up toward ~7.4% at the long end.

SDLs add state-specific supply risk, not default in the corporate sense. Spreads over G-Secs have often sat near 50 bps historically but widened toward 70–90 bps in recent heavy-issuance phases; useful extra yield if you can live with slightly weaker liquidity.

Corporate NCDs price off that sovereign curve plus a credit spread. Around end-August 2026, long-dated AAA spreads were about 100 bps and AA about 209 bps. Secured NCDs must keep at least 100% security cover (principal plus interest) and appoint a SEBI-registered debenture trustee. Unsecured paper leans only on issuer cash flows and ranking in insolvency. Convertible debentures are a different product: they can become equity; most listed retail paper is non-convertible.

Liquidity is the gap textbooks skip. On-the-run G-Secs trade in size every day. Most corporate bonds, especially below AAA or odd lots, are quote-driven and can gap on exit. That is why yield-to-maturity on an NCD is not the same as a cash-like return.

How Retail Investors Actually Buy Them

Government paper: Open an RBI Retail Direct Gilt account. Minimum ticket is ₹10,000. By late July 2026, the scheme had about 3.77 lakh accounts, 6.59 lakh registrations, cumulative primary subscriptions of ₹9,573 crore and gilt holdings around ₹4,051 crore, still tiny versus the sovereign stock, but growing as deposit rates lag the curve.

Corporate paper: You need a demat and trading account. Listed NCDs trade on NSE/BSE. Most supply never hits a public offer; it is privately placed with institutions and later trickles into the secondary market. Always read the rating (CRISIL, ICRA, CARE, India Ratings), security cover certificate, call/put dates, and trustee name, not just the coupon.

Tax is Part of the Yield

Coupon on G-Secs, SDLs, and taxable corporate bonds is Income from Other Sources at your slab. Section 193 TDS is generally 10% once interest from an issuer crosses the statutory threshold (commonly cited at ₹10,000 a year; 20% without PAN). The old TDS exemption for listed demat debentures was withdrawn from FY24. For Government Securities (like 8% Savings Bonds), the TDS threshold is also ₹10,000, but standard dated G-Secs don’t deduct TDS for retail investors under the RBI Retail Direct scheme.

Listed bonds/NCDs held for more than 12 months attract LTCG at 12.5% without indexation. Held for 12 months or less, gains are taxed at slab. Unlisted bonds, unlisted debentures and market-linked debentures are treated as short-term under Section 50AA regardless of holding period. Sovereign Gold Bonds held to maturity keep the capital-gains exemption on redemption; their coupon is still taxable. Older tax-free PSU bonds remain coupon-exempt under Section 10(15), but they are a closed stock.

Which Sleeve Belongs in the Portfolio

Use G-Secs (and, for a modest extra yield, SDLs) as the safety and duration sleeve, especially if you want to mark-to-market with RBI Retail Direct or a gilt fund. Use investment-grade listed NCDs only as a spread sleeve, sized to credit and liquidity risk, after checking rating, security, and call structure. Do not treat an 8–9% NBFC NCD as a substitute for a 7% G-Sec.

A practical mix for most retail investors: sovereign paper for the core, a few high-grade listed corporates for incremental yield, tenors matched to when the money is needed. The name on the term sheet matters less than the issuer, the charge, the spread and the exit.

FAQs