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Most people think of fixed income as the boring part of a portfolio, the money sitting in FDs earning whatever the bank offers. That framing costs real money over time. India has a rich fixed income landscape: government bonds, state bonds, treasury bills, corporate debentures, gold bonds, and specialised tax-saving instruments. Each serves a different purpose, carries different risk, and offers different after-tax returns. Knowing which to use and when is not complicated, it just requires a clear map.
Why fixed income matters more than people think
Fixed income is not just about safety. It is about having capital available when you need it, without being forced to sell equity at the wrong time. A portfolio with a well-constructed fixed income base gives you the confidence to hold your equity through corrections, because you know your near-term needs are funded by instruments that do not fall 30% in a bad market.
The biggest mistake I see is treating fixed income as one undifferentiated category. “I have FDs” is not an answer to fixed income allocation any more than “I have stocks” is an answer to equity allocation. The quality, tenor, tax efficiency, and purpose of each fixed income holding matters.
This also connects to a bigger point about building wealth over time. The equity portion of your portfolio is where compounding does the heavy lifting, but that compounding only works if you are never forced to liquidate at the wrong time. Fixed income is the foundation that makes equity patience possible. I write about this broader framework in my long-term wealth building post.
The full landscape, what exists and what it does
Fixed Deposits
Bank FDs remain the default entry point for most Indian investors. DICGC insurance covers up to ₹5 lakh per depositor per bank. Interest is taxable at slab rate. Major scheduled commercial banks offer yields roughly tracking the RBI repo rate, typically 50–100 basis points below equivalent-tenor G-Sec yields. For amounts under ₹5 lakh, the implicit insurance makes FDs effectively risk-free. For larger amounts, G-Secs provide better safety with comparable or better yields.
Small finance banks offer higher FD rates, sometimes 1–2% above large banks, but carry meaningfully higher credit risk. They are also covered by DICGC up to ₹5 lakh. For amounts within that limit and with a risk-aware investor, small finance bank FDs can be a yield enhancer.
Treasury Bills
T-bills are short-term instruments from the central government with 91-day, 182-day, or 364-day tenors. Issued at a discount to face value, you receive face value at maturity. No periodic interest. Yield is determined at auction. Available directly through RBI Retail Direct at no cost.
T-bills are ideal for parking short-term surplus at sovereign safety. They typically yield close to or slightly below the RBI repo rate. For emergency fund money that you want earning something but absolutely must not fall in value, T-bills work well, though the discount/maturity structure means the yield is classified as short-term capital gain at maturity, taxed at your slab rate.
Government Securities (G-Secs)
Central government bonds with tenors from 2 to 40 years. Semi-annual coupon. Available via RBI Retail Direct in primary auctions (non-competitive bidding) and secondary market. Sovereign guarantee, no credit risk. Interest taxable at slab rate. Capital gain on sale before maturity is STCG or LTCG depending on holding period.
For medium and long-term fixed income (3–20 years), G-Secs on RBI Retail Direct are the cleanest instrument. No intermediary, no expense ratio, no credit risk. The 10-year G-Sec yield has historically been 1.5–2.5% above inflation, making it a genuine real-return instrument for longer horizons.
State Development Loans (SDLs)
State government bonds, structurally identical to G-Secs but issued by states. Yield 25–50 basis points more than central G-Secs of the same tenor. Same tax treatment. Available on RBI Retail Direct and NSE/BSE. No state has defaulted on SDLs. Good for building a fixed income ladder where the SDL portion picks up extra yield without meaningful credit risk addition.
Non-Convertible Debentures (NCDs)
Corporate bonds issued by companies in public issues or listed on BSE/NSE. Secured or unsecured. Higher yield than G-Secs because of corporate credit risk. Interest taxable at slab rate. Secondary market liquidity variable. AAA NCDs from large NBFCs are relatively safe but not government-backed. Lower-rated NCDs carry meaningful default risk, IL&FS was rated AAA before its 2018 default.
NCDs belong in the satellite portion of a fixed income portfolio, not the core, and only for investors who can evaluate the issuer’s credit quality. For a detailed comparison, see my NCD vs FD post.
Sovereign Gold Bonds (SGBs)
Government bonds denominated in gold. 2.5% annual interest on original issue price. Capital gain tax-free at 8-year maturity. The RBI suspended new SGB issuances in 2024, secondary market buying on BSE/NSE is now the only option. For secondary market purchases held to maturity, the tax-free exit advantage persists if you find them at fair prices.
SGBs are part of the gold allocation of a portfolio, not the fixed income allocation in the traditional sense. They respond to gold prices, not interest rates. I discuss them in detail in my gold investing post.
54EC Bonds
Issued by NHAI, REC, PFC, IRFC. Used specifically to claim LTCG exemption on property sale proceeds under Section 54EC. 5-year lock-in, ~5.25% interest (taxable). Not a general investment product, solely for capital gains tax management. Maximum ₹50 lakh, must invest within 6 months of property sale.
The risk ladder
Fixed income instruments in India can be arranged on a risk ladder, from lowest to highest:
At the safest end: G-Secs and T-bills (sovereign, RBI issued). Effectively equivalent for practical purposes: SDLs (state government, near-sovereign). Next tier: FDs from large scheduled banks within DICGC limits. Beyond that: FDs from smaller banks (within DICGC limits), then small finance bank FDs. Stepping up in risk: AAA NCDs from systemically important NBFCs. Then: AA and lower rated NCDs. At the high-risk end of “fixed income”: unlisted private placement debentures, unsecured NCDs from lesser-known issuers.
Nothing in fixed income is truly risk-free at high yield. If someone is offering you 12–14% in a “fixed income” instrument, that is not fixed income, it is equity risk dressed in fixed income clothing. The risk ladder is fairly consistent: more yield always means more credit risk, more illiquidity, or both.
Tax efficiency comparison
| Instrument | Interest Tax | Capital Gains (maturity) | Capital Gains (early exit) |
|---|---|---|---|
| FD | Slab rate | N/A | Penalty on interest, not CG |
| T-bill | N/A (discount instrument) | STCG at slab (under 1 year) | STCG at slab |
| G-Sec | Slab rate | No CG event | STCG or 10% LTCG |
| SDL | Slab rate | No CG event | STCG or 10% LTCG |
| NCD (listed) | Slab rate | No CG event | STCG at slab or 20% LTCG with indexation |
| SGB (8-year maturity) | 2.5% at slab rate | Tax-free | LTCG at 20% with indexation |
| 54EC Bonds | ~5.25% at slab rate | LTCG exemption (Section 54EC) | Exemption reversed if before 5 years |
A framework for the debt portion of your portfolio
Here is how I think about structuring fixed income. It is not a rigid formula, it is a way of thinking about what each rupee in fixed income is doing.
Core (50–70% of fixed income): Sovereign instruments. G-Secs and T-bills via RBI Retail Direct for the main part. SDLs for tenor extensions above 7 years. This is the foundation. It earns a fair yield, carries zero credit risk, and will be there when you need it regardless of what happens in credit markets.
FD tier (20–40% of fixed income): Bank FDs for amounts within DICGC coverage. Useful for investors who prefer the simplicity of breaking an FD over navigating bond markets, and for capital that may need to be accessed on short notice. Keep FDs spread across 2–3 banks if amounts are significant.
Satellite (0–20% of fixed income): AAA NCDs from well-understood issuers, if at all. Only for investors who have done the credit homework. Not the emergency fund. Not goal-specific money with a hard deadline. Only surplus fixed income allocation where the yield premium genuinely compensates for the complexity and credit risk.
Specific purpose: 54EC bonds only if you have LTCG from a property sale and the tax math works out. Secondary market SGBs only if you find pricing that justifies the additional effort over a Gold ETF.
The tenor matching principle
The single most important principle in fixed income allocation is matching the tenor of your instruments to your actual needs. Emergency fund money belongs in T-bills or short-term FDs, not in a 10-year G-Sec that might be at a capital loss when you need it. Money for a goal 8 years away can go into longer-dated G-Secs or SDLs, locking in today’s yield makes sense when you know you will hold to maturity.
Mismatching tenor is how people end up selling bonds at a loss or breaking FDs with penalties. The liquidity risk in fixed income is largely a self-inflicted problem caused by buying long when the money had a short need.
Debt mutual funds, where they fit
Debt mutual funds, liquid funds, short duration, medium duration, gilt funds, are a valid alternative to direct bond holding. They offer professional management, diversification across many bonds, daily liquidity, and SIP capability for systematic fixed income investing.
The trade-off is expense ratio (typically 0.1–0.5% per year for direct plans) and the fact that you do not control what the fund manager buys. Some debt funds have surprised investors with credit events, funds holding IL&FS or DHFL bonds suffered real losses.
For smaller portfolios where navigating RBI Retail Direct feels overwhelming, a good gilt fund (investing only in government securities) or a liquid fund is a reasonable starting point. For larger portfolios, direct G-Secs and SDLs via Retail Direct are worth the modest effort, you eliminate the expense ratio, know exactly what you hold, and have a direct relationship with the sovereign issuer.
The psychology of fixed income
There is a persistent temptation to squeeze extra yield from the fixed income portion of a portfolio, to reach for NCDs when FDs feel boring, to hold 10-year bonds when money is needed in two years, to chase small finance bank FDs for the extra 1.5% without thinking about what that bank actually does.
That temptation is worth resisting. Fixed income is not where you grow wealth, it is where you protect it and keep it available. The equity portion of your portfolio can generate real wealth if given time and not disrupted. Protecting that process by having genuinely safe fixed income is more valuable than optimising yield in the debt bucket.
The impulse to chase yield in fixed income often comes from the same place as many financial mistakes, comparison with what others are supposedly earning. I wrote about that dynamic in my post on financial envy. The solution is knowing what role each part of your portfolio plays and being genuinely satisfied with sovereign yields doing their job.
Putting it together
The fixed income landscape in India offers more than most investors use. T-bills and G-Secs through RBI Retail Direct are free, direct, and sovereignly safe, yet most people have never opened a Retail Direct account. SDLs add a few basis points of yield with near-sovereign safety. NCDs can make sense for the right investor with the right issuer. SGBs remain interesting on the secondary market for gold allocation. 54EC bonds are a specific tax tool for property sellers.
None of this is complicated once you understand what each instrument is doing and what risk it carries. The key is starting with the purpose, what is this money for, when will I need it, and what is the maximum credit risk I should accept for that purpose, and then choosing the instrument that best serves that purpose.
Frequently asked questions
What is the safest fixed income option in India? G-Secs via RBI Retail Direct, sovereign guarantee, no credit risk. For amounts under ₹5 lakh, bank FDs with DICGC insurance are effectively equivalent.
Are debt mutual funds better than direct bonds? Depends on your portfolio size and comfort level. Direct bonds eliminate expense ratios and give you full transparency. Debt funds give professional management, diversification, and SIP capability. A gilt fund is the closest debt fund equivalent to holding G-Secs directly.
How much of my portfolio should be in fixed income? No single right answer. What matters: does your fixed income cover near-term needs without requiring you to sell equity at bad times? If yes, the allocation is probably right for your situation.
What is the tax on fixed income in India? Interest is taxed at slab rate for all instruments except SGB maturity gain (tax-free) and 54EC bonds (LTCG exemption). Capital gains vary by instrument and holding period, see the table above.
Start with your purpose for each rupee in fixed income, how long can it be locked away, how certain does the return need to be, and let that answer drive you to the right instrument, rather than starting with yield and working backward.
This post is for educational purposes only. It is not financial advice. Mohit Mehra is not a SEBI registered investment advisor. Please consult a qualified financial advisor before making investment decisions.