Bonds are debt instruments which allow investors to earn fixed income over a period of time. If you are looking to park your idle funds without undertaking much risk, while also getting stable returns, you can consider investing in PSU bonds.


Public Sector Undertaking bonds or PSU bonds are issued by government sector companies and undertakings having 51% or more share of central or state government to fund their projects and meet their working capital needs. While government ownership makes PSU bonds safe long-term investments, they are still a type of corporate bond.


When it comes to interest earnings, PSU bonds offering 7 - 9% are widely compared to FDs, which offer around 6.0 - 7.5%. To know more about the features and benefits of investing in PSU bonds in India, read on.

A Guide to Investing in PSU Bonds

There are mainly two ways to invest in PSU bonds -

  • First, pick and choose individual PSU bonds in the market, and directly invest in them.

  • The second way is to choose a PSU mutual fund or PSU debt fund. In these, fund managers pool money from many investors. Then, they invest more than 80% of these shared funds in PSU bonds and other public financial institutions. The remaining 20% will be invested in high-quality NBFCs, government securities and liquid assets.


Any individual, corporate or government entity can invest in PSU bonds. However, mutual fund firms, investment bankers, and pension fund bodies such as the EPFO are usually allocated these bonds through private placement.


Such bonds are suitable for investors with a low risk appetite, and those who want a regular payout. It is also suitable for new investors who don’t have a lot of market knowledge. All you need to do is pick a PSU bond that aligns with your investment goals and hold it till maturity.

Key Features of PSU Bonds

By investing in PSU bonds, you get to enjoy a number of benefits.

  • High Credit Rating

Government entities are considered unlikely to default. Hence, bonds issued by PSUs usually have a high credit rating.

  • Liquidity

These bonds are relatively liquid as they can be easily traded in the secondary market.

  • Regular Interest Income

PSU bonds are fixed-income instruments, which means that they provide guaranteed periodic income to investors.

How are PSU Bonds Taxed?

If you sell or redeem these bonds after 3 years, you pay 20% LTCG with indexation. This is beneficial to high-income taxpayers in the 30% tax slab, who incur around 10% lesser tax on these bonds.


However, if you redeem before 3 years, however, you have to pay STCG tax as per your tax slab.


Also coupon interest is taxable as income from other sources as per slab rates, unless it is a tax free bond which has a lower coupon rate compared to regular taxable bonds.

Types of PSU Bonds in India

Many reputed PSUs in India issue bonds. Here’s a look at two popular PSU bonds available in the market.

1. PSU bank bonds

These are issued by PSU banks, which are under the control of the Central Government. You can consider such bonds as an alternative to FDs, as they offer higher interest rates, and tax benefits under certain conditions.

2. PSU tax-free bonds

The interest earned on such bonds are exempt from income tax. PSUs such as the NHAI, HUDCO, NTPC, PFC, REC, and others issue tax-free bonds.


Benefits of Investing in PSU Bonds

  • Minimal Risk of Default

PSU bonds are comparatively low-risk, since they are issued by PSUs, which have majority government ownership. This makes them much safer than bonds issued by the private sector and, hence, a good option for risk-averse investors.

  • Stable Yield

PSU bond interest rates are generally around 8-9%, throughout the maturity period. Government support makes these bonds less vulnerable to market fluctuations, which ensures a stable yield.

  • Long-Term Investment Value

These bonds have a maturity period of 5-10 years, making it a viable option to earn regular income, over a long period of time.

How to Choose the Best PSU Bonds

Here’s what to consider before buying a PSU bond:

  • Credit Rating

Once you go through a list of PSU bonds in India, pick one according to your risk appetite. If you have a moderately high appetite, you can pick a lower rated bond. Else, opt for a AAA rated bond.

  • ROI

While a high yield is preferable, remember that a higher yield implies lower credit rating.

  • Maturity

Align your bond maturity date according to your investment and liquidity requirements to get the most out of it.

  • Government Guarantee

Government guaranteed PSU bonds are highly unlikely to default, hence they are a safer investment option available.


Overall, PSU bonds are secure investments which aid in long term wealth creation. To start investing in these bonds, visit Bajaj Markets.


As an investor, it is important to maintain a balanced investment portfolio. PSU bonds allow you to reduce risk by diversifying your fund allocation. Also keep in mind that there are multiple debt instruments available in the market. Always do your own research and choose the best option for your goals.


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FAQs on PSU Bonds in India

Are PSU bonds the same as government bonds?

No, PSU bonds are issued solely by PSUs, which are government-owned entities, whereas, government bonds are issued directly by the central and state governments.

Do all PSU bonds have government guarantee?

There is an implicit guarantee due to government ownership of PSUs.

Are PSU bonds safer than private sector bonds?

Generally, yes. This also depends on individual credit rating. For example, an AAA rated private sector bond is safer than an ‘AA’ rated PSU bond. However, when you compare a AAA rated PSU bond with a AAA rated private sector bond, the PSU bond is safer.

Are PSU bonds better than FDs?

PSU bonds generally offer better interest rates than FDs. However, both have their merits, which should be carefully considered before investment.

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