PSU Bonds: Meaning, Features, and How to Invest

30 October 2025

What Are PSU Bonds?

Public Sector Undertaking (PSU) Bonds are one of the most recognized fixed-income investment options in India. They are often considered relatively safer because they are issued by government-backed enterprises. For investors seeking predictable returns and moderate risk, PSU Bonds offer a balance between safety and yield.

In this article, we’ll understand the meaning of PSU Bonds, their interest rates, types, benefits, risks, and the process to buy them in India.

PSU Bonds full form stands for Public Sector Undertaking Bonds. These are debt instruments issued by government-owned companies (PSUs) to raise funds for infrastructure development, business expansion, or working capital needs.

When you invest in PSU Bonds, you are essentially lending money to a public sector company, which in turn pays you periodic interest (coupon) and returns the principal at maturity.

For example, companies such as REC Limited, PFC (Power Finance Corporation), NABARD, and NHAI are among the common issuers of PSU Bonds in India.

PSU Bonds Meaning and How They Work

PSU Bonds function like most other fixed-income securities. Investors purchase these bonds for a fixed period, earning regular interest payments and principal repayment at the end of the tenure.

Here’s how it works:

  • Issuer: A PSU like REC or PFC issues bonds to raise capital.

  • Investor: You, as an investor, buy these bonds for a certain amount.

  • Coupon Rate: The issuer promises a fixed rate of interest (for example, 7.5% annually).

  • Maturity: At the end of the bond tenure, the issuer repays your initial investment.

The interest from PSU Bonds is typically paid semi-annually or annually, and the bonds may be listed on exchanges for secondary market trading.

PSU Bonds Interest Rates

The interest rates of PSU Bonds in India generally range between 7% to 9% per annum, depending on the issuer’s credit rating, market conditions, and bond tenure.

For example:

  • REC Bonds and PFC Bonds often offer yields between 7.3% to 8.5%.

  • NABARD Bonds and IRFC Bonds may offer similar returns, depending on market demand and credit profile.

While PSU Bonds are not entirely risk-free, their government ownership typically enhances credit reliability.

Why Do PSUs Issue Bonds?

Public Sector Undertakings issue bonds to fund various activities, including:

  • Infrastructure development projects

  • Capital expansion and modernization

  • Refinancing existing debt at better rates

  • Supporting working capital needs

By issuing bonds, PSUs can raise capital efficiently without relying solely on bank loans.

Benefits of Investing in PSU Bonds

1. Relatively Safe Investment

PSU Bonds are backed by government-owned entities, which reduces default risk compared to private corporate bonds.

2. Regular Income

Investors receive periodic interest payments, ensuring predictable cash flow.

3. Stable Returns

Fixed coupon rates make PSU Bonds attractive for investors seeking stability rather than market-linked volatility.

4. Diversification

Including PSU Bonds in a portfolio can help diversify beyond equities or mutual funds.

5. Listed for Liquidity

Many PSU Bonds are listed on exchanges, allowing investors to sell them in the secondary market before maturity.

Risks Involved in PSU Bonds

While PSU Bonds are considered safer than corporate bonds, they still carry certain risks:

1. Interest Rate Risk:

If interest rates rise, the market value of existing bonds may fall.

2. Liquidity Risk:

Some PSU Bonds may have lower trading volumes in the secondary market.

3. Credit Risk:

Though rare, a PSU’s financial performance can impact its ability to pay timely interest or principal.

4. Taxation Risk:

Interest earned is fully taxable as per individual income tax slabs, reducing post-tax returns.

How to Buy PSU Bonds in India

Investors can purchase PSU Bonds through multiple channels:

1. Primary Market

When PSUs issue new bonds, investors can subscribe directly during the issuance period through:

  • Authorised brokers or banks

  • RBI’s Retail Direct platform (for certain government-linked bonds)

2. Secondary Market

After issuance, PSU Bonds are listed on stock exchanges like NSE or BSE, allowing investors to buy and sell through:

  • Registered brokers

  • SEBI-registered Online Bond Platform Providers (OBPPs)

3. Through Demat Account

Investors can hold and trade PSU Bonds in their Demat accounts, just like shares or mutual funds. The process ensures transparency and ease of settlement.

Example: PSU Bonds in Action

For instance, REC Limited, a Maharatna PSU, frequently issues secured redeemable non-convertible debentures (NCDs). Suppose REC issues a 10-year bond with an 8% coupon rate:

  • You invest ₹10,000.

  • You receive ₹800 annually as interest.

  • At maturity, REC repays ₹10,000 (principal).

This example is illustrative and for educational understanding only.

Are PSU Bonds Safe?

PSU Bonds are generally considered safer due to:

  • Government ownership or backing

  • Strong credit ratings (mostly AAA or AA)

  • Regulated issuance under SEBI and RBI guidelines

However, investors should always review the issuer’s financial strength, bond rating, and offer documents before investing.

Who Should Consider PSU Bonds?

PSU Bonds can be suitable for:

  • Conservative investors seeking regular income.

  • Retirees looking for predictable cash flow.

  • Diversified investors who want to balance equity-heavy portfolios.

These bonds fit well in fixed-income allocation strategies, offering a mix of stability and moderate yield.

FAQs

1. What is the full form of PSU Bonds?

PSU Bonds stand for Public Sector Undertaking Bonds, issued by government-owned enterprises to raise capital.

2. How to buy PSU Bonds in India?

You can buy PSU Bonds via the primary market during new issuances or the secondary market through brokers or online bond platforms like BondScanner.

3. Are PSU Bonds tax-free?

No, interest earned from PSU Bonds is taxable as per the investor’s income tax slab.

4. Are PSU Bonds safe to invest in?

They are relatively safer than corporate bonds due to government backing and strong credit ratings, but not completely risk-free.

5. What are typical PSU Bond interest rates?

Interest rates usually range between 7% and 9% per annum, depending on the issuer and tenure.

6. Can PSU Bonds be traded before maturity?

Yes, if listed on exchanges, investors can sell PSU Bonds in the secondary market before maturity.

Conclusion

PSU Bonds play an important role in India’s fixed-income landscape. They combine the reliability of government-backed issuers with the benefits of predictable interest income. While they are not risk-free, their transparency, steady yields, and accessibility make them a preferred choice for conservative investors.

Investors can explore a range of rated PSU Bonds from India’s leading issuers with complete transparency on yield, maturity, and credit rating — helping you make informed investment decisions in the bond market.

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.

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