Practical Guide to Buying PSU Bond Issues in India

Introduction

Public Sector Undertaking (PSU) bonds play a significant role in India’s fixed-income ecosystem. Issued by government-owned entities, these bonds are often used to fund large infrastructure and development projects.

Many investors seek clarity on how to invest in NHAI bonds, how NTPC bonds, REC bonds, and PFC bonds work, and how PSU bonds differ from other fixed-income instruments. This guide offers a practical, educational overview of PSU bond issues, their structure, and the buying process—without recommending any specific investment.

What Are PSU Bonds?

PSU bonds are debt instruments issued by Public Sector Undertakings—companies where the Government of India holds a majority stake.

Key characteristics:

• issued by government-owned entities

• used for infrastructure, power, finance, and development projects

• offer fixed or floating interest rates

• available in multiple maturities

• may be secured or unsecured

PSU bonds sit between government securities and private corporate bonds in terms of credit profile and yield behaviour.

Why PSU Bonds Matter in India’s Bond Market

PSU bonds are important because they:

• fund national infrastructure and development

• provide long-term capital to public enterprises

• help deepen India’s corporate bond market

• offer diversified fixed-income exposure

Issuers like NTPC, NHAI, REC, and PFC are closely linked to India’s power and infrastructure sectors, making their bond issuances closely watched.

Key PSU Bond Issuers: NTPC, NHAI, REC & PFC

NTPC Bonds

Issued by National Thermal Power Corporation, these bonds support power generation and energy infrastructure.

NHAI Bonds

Issued by the National Highways Authority of India, NHAI bonds are used to finance highway construction and road development projects.

REC Bonds

Rural Electrification Corporation bonds fund power distribution and electrification projects.

PFC Bonds

Power Finance Corporation bonds support financing for power-sector companies and infrastructure.

Each issuer operates under its own mandate, affecting bond structure, maturity, and risk profile.

Understanding PSU Bonds Interest Rates

PSU bonds interest rates depend on several factors:

• prevailing government bond yields

• credit rating of the issuer

• maturity tenure

• whether the bond is secured or unsecured

• market liquidity

Generally:

• longer tenures tend to offer higher yields

• higher-rated PSU bonds offer lower yields compared to lower-rated issuances

• Interest may be paid annually, semi-annually, or at other specified intervals.

Tax-Free Bonds & Upcoming Tax-Free Bonds

Some PSU bonds are issued as tax-free bonds, where interest income may be exempt from tax under specific provisions.

Key points:

• tax-free bonds are issued only when notified by the government

• not all PSU bonds are tax-free

• eligibility, limits, and interest rates vary by issue

• references to upcoming tax-free bonds depend on government announcements

Tax-free bonds are not issued regularly and availability is subject to policy decisions.

Primary vs Secondary Market for PSU Bonds

Primary Market

• bonds are purchased during the issuance period

• allocation follows issue terms and subscription rules

Secondary Market

• bonds are bought and sold on stock exchanges

• prices fluctuate based on interest rates and demand

• liquidity varies by bond series

Both markets offer different access points depending on availability and timing.

How to Invest in NHAI Bonds & Other PSU Bonds

Step-by-Step Overview (Educational)

Step 1: Identify the Bond Issue

Check whether the PSU bond is available in the primary issue or listed in the secondary market.

Step 2: Review Issue Details

Understand coupon rate, maturity, credit rating, and tax status.

Step 3: Ensure Required Accounts

demat account

trading account (for secondary market)

bank account linked for interest payments

Step 4: Place Application or Order

primary issue: apply during the subscription window

secondary market: place buy order on the exchange

Step 5: Allotment & Holding

Bonds are credited to the demat account after allotment or trade settlement.

This process applies broadly when exploring how to invest in NHAI bonds, NTPC bonds, REC bonds, or PFC bonds.

Holding, Interest Payments & Redemption

Interest Payments

• paid periodically as per bond terms

• credited to the registered bank account

Holding Period

bonds can be held until maturity or sold earlier in the secondary market

Redemption

• principal is repaid at maturity

• redemption value is usually face value

Understanding cash flow timing helps align PSU bonds with financial planning needs.

Taxation Aspects of PSU Bonds

Tax treatment depends on bond type and current tax laws.

General principles:

• interest income is typically taxable unless specified as tax-free

• capital gains tax applies if bonds are sold before maturity

• tax rules vary based on holding period and bond structure

Tax regulations may change and should always be reviewed independently.

Risks & Limitations to Understand

Despite their public-sector backing, PSU bonds are not risk-free.

Key risks include:

• interest-rate risk

• credit risk (issuer-specific)

• liquidity risk in secondary markets

• reinvestment risk

• regulatory or policy changes

Evaluating these risks is important before studying PSU bond suitability.

Common Misconceptions

Misconception 1: All PSU bonds are tax-free

Only specific issues are notified as tax-free.

Misconception 2: PSU bonds are the same as government bonds

They are issued by government-owned companies, not the sovereign.

Misconception 3: PSU bonds offer guaranteed returns

Returns depend on interest rates and issuer obligations.

Misconception 4: PSU bonds are always liquid

Liquidity varies across issuances.

Conclusion

PSU bond issues from entities such as NTPC, NHAI, REC, and PFC form an important segment of India’s fixed-income market. Understanding how to invest in NHAI bonds, how NTPC bonds, REC bonds, and PFC bonds are structured, and how PSU bonds interest rates are determined provides clarity before exploring these instruments.

Whether accessed through primary issuance or the secondary market, PSU bonds require awareness of structure, taxation, and risk factors.

Disclaimer

This blog is intended solely for educational and informational purposes. The bonds and securities mentioned herein are illustrative examples and should not be construed as investment advice or personal recommendations. BondScanner, as a SEBI-registered Online Bond Platform Provider (OBPP), does not provide personalized investment advice through this content.

Readers are advised to independently evaluate investment options and seek professional guidance before making financial decisions. Investments in bonds and other securities are subject to market risks, including the possible loss of principal. Please read all offer documents and risk disclosures carefully before investing.