Firstly, Retail Direct Gilt (RDG) is an initiative of the RBI – Reserve bank of India under the Retail Direct Scheme. This was done to increase retail participation in government securities. Secondly, this article is fact-heavy as a result of which a user might feel boring. To grasp the content, read the article in parts.
What is Gilt?
A gilt account is similar to our bank account. We keep money in our bank account in the form of currencies. A gilt account on the other hand is used to hold government bonds and securities.
According to Economic times – “The government bond used to be issued in-golden edged certificate. The nick name GILT comes from gilded edge certificates. Also the fact that these used to have gilet on the edges of the certificate”
Economic Times
Basically, gilt is a term of the British era. The gilt account is used to buy government securities (Bonds) i.e G-Sec, Treasury Bills and State Development Loans etc. Retail Direct Gilt is for the retailers.
A bond is a type of asset. We will discuss bonds and their types in a different article. Because it is going to be a long one. Here we can conclude that a gilt account was necessary to buy a government bond.
Who are allowed to open Gilt account?
Banks, Primary Dealers, Insurance Companies, Mutual Funds were allowed to open Gilt account in India. However, individuals were not allowed to open the gilt account in India. There was no mechanism for them Retail Direct Gilt provided a way for them to participate in the Government’s bond market.
Firstly, the primary market of Bonds is a place where banks, mutual funds, insurance companies can participate in the bond auction process.
Secondly, the auction of bonds is similar to IPO in the stocks market. The secondary market where government securities are traded NDS-OM managed by CCIL. The process is as follow.
- NDS -OM stands for Negotiated dealing system order matching. This system is owned by RBI.
- CCIL is Clearing Corporation of India Limited. It manages NDS-OM
- NDS-OM Administrator (CCIL) would create an authorized super-user (Client Head) for the PM – Primary Members for attending to the management activities.
- Primary members includes – People who are authorized by RBI to open Gilt Account. These are none other than institutions like Bank, Insurance Companies, Mutual Funds etc
- GAH – Gilt Account Holders are people who have gilt accounts with PM (Primary member)
Can a retailer open a GAH account? The answer is no. Firstly, for opening a GAH account a condition is that an entity should have SGL – Subsidiary General Ledger Account with the Public Debt Office? Secondly, retailers cannot open an SGL account. Eligibility criteria of SGL as per RBI notification of Sep 13, 2011 & CNBC
How can we open Retail Direct Gilt Account with RBI?
As per RBI notification issued on 12 July 2021 stating retail investors can participate in buying government securities. But so far, no steps have been taken to create a portal for retail investors. However, a model guideline of the features is unveiled by the RBI notification. Basically, till further notice, a retailer cannot open an account.
Features of the upcoming Retail Direct Gilt Account
The platform for retailers will include the following features.
- Access to primary markets for bonds similar to IPO bidding in stock markets
- Access to secondary market similar to share trading terminal of demat accounts
Trading options for retailers in Government Bonds
A bond market is a boring place because of two reasons. Firstly, there are only 4 options to choose from. Secondly, interest rates don’t change rapidly overnight. Finally, the four options of RDG are as follows.
- Government of India Treasury Bills;
- Government of India dated securities;
- Sovereign Gold Bonds (SGB);
- State Development Loans (SDLs). – source RBI
Now finally retailers can buy their own bonds in their own account with RBI’s announcement. But wait that is not all Retail direct gilt is still a distant dream to come true. Where is the platform? For now, it’s in the clouds.
Why will people buy government bonds?
Firstly, we have to understand risks with financial instruments. We will list the 3 most popular instruments and discuss them to come to a conclusion.
- Equity/Mutual Funds/Derivatives etc lets call them Market Linked Product – Very Risky dependent on market demand and supply
- Fixed Deposits/ Certificate of Deposit/ Post office deposit – Default Risk
- Bonds Government, we are not taking corporate bonds into this example – Only risk is inflation and interest rate risk.
Mostly, returns on bonds are very less. Let me show you how. The maximum return on bond is 6.8% annually. An investment of 100000 INR will give us 6800 INR at the end of 1 year.
Simple Mathematics
Secondly, Compare this with the returns from stocks, mutual funds and derivatives. Now keep this information aside and analyse the two statements below.
- The principal amount of an investment made in government bond has a guarantee of 100%. If you invest 100, 1000, or 1 Cr or 1000 Cr the principal is 100% protected. This guarantee is given by the government of India and is know as soverign guarantee.
- The principal protection in market linked product is 0. Finally, we know that a stock, mutual fund and derivatives can become 0 over a period of time. There is no protection whatsoever.
Mostly, pension fund managers, insurance companies, mutual funds, gilt funds, NBFCs invest in the bond markets because of this reason. Therefore, government bonds are a very lucrative instrument for an investor who wants to invest huge sums. This might not be very lucrative for the retailers because they need liquidity with their funds. However, if people are willing to wait then government bonds are the most stable financial instrument available in India.
Retail Direct Gilt Vs Gilt Funds Taxation
On one hand, the RBI is inviting retailers to participate in the market. On the other hand, their participation will result in taxation. Let us understand this with the help of an example.
Firstly, let us consider 10 Lac INR investment in Retail direct gilt account RDG account at 6.8% pa of return. The interest is 68000 INR. The taxable income for the assessment year will increase by 68000 INR.
Secondly, let us consider a 10 Lac INR investment in Gilt Fund. Taxation will be either STCG – Short term capital gains or LTCG – long term capital gains. STCG rate is 15% on gains and LTCG is 10% of gains in India.
Minimum amount of Investment in Government Bonds under the Retail direct gilt
Finally, for now, the minimum investment amount for institutions in government bond is as follow.
- The Lot size for the Standard Market is minimum Rs.5 crore and in multiples of Rs. 5 crore.
- In the Odd Lot segment the minimum lot size is Rs.10,000 for Central and State Government Securities
- For Treasury Bills the amount is Rs.25,000 source RBI