Bonds and Debentures: ratings, tax-free bonds, laddering

How a bond pays you

Three numbers decide everything

Face value, coupon and maturity. Most listed bonds have a face value of ₹1,000 or ₹10,000, though some corporate issues start at ₹1 lakh.

Face value. The amount the issuer promises to pay back on the maturity date. It is also the base on which interest is worked out.
Coupon. The yearly interest as a percentage of face value. It stays the same for the life of the bond, unless it is a floating-rate bond linked to a benchmark.
Maturity. The date your money comes back. Interest is paid yearly, half-yearly or, in a few issues, monthly until then.

A debenture is the same idea issued by a company. Secured debentures are backed by specific assets of the company; unsecured ones are backed only by its promise, which is why they usually pay more.

Worked example

You buy: 100 bonds of ₹1,000
Amount invested: ₹1,00,000
Coupon: 8% a year*
Paid half-yearly: ₹4,000 each time
Interest over 5 years: ₹40,000
Paid back at maturity: ₹1,00,000

*Assumed rate for illustration. Actual coupons depend on the issuer, its rating and rates at the time of issue. Interest is taxable at your slab unless the bond is a notified tax-free bond.

Price and yield

Why a bond's price moves after you buy it

The coupon is fixed, but the market price is not. If new bonds start paying more, your older bond is worth less to a buyer, and the other way round. It only matters if you sell before maturity.

Same bond: ₹1,000 face, 7% coupon, 5 years left	Market rate for similar bonds	Approx. price a buyer pays	What it means for you
Rates fall	6%	about ₹1,042	You could sell at a gain, or keep collecting 7%
Rates unchanged	7%	₹1,000	Price stays near face value
Rates rise	8%	about ₹960	Selling now books a loss; holding to maturity still returns ₹1,000

Rates are assumed rates for illustration. Prices are rounded and assume yearly coupon payments. The return you lock in when you buy at a market price is called yield to maturity (YTM), and that is the number to compare, not the coupon.

Credit ratings

The rating tells you who might not pay

Every listed bond and debenture is rated by SEBI-registered credit rating agencies. The rating is an opinion on how likely the issuer is to pay interest and principal on time. It is not a promise, and ratings can be cut while you hold the bond.

A higher coupon from a lower-rated company is payment for taking more risk. When a debenture offers 2 to 3 percentage points more than a top-rated bond of the same tenure, ask why.

Our rule of thumb for income money: stay with AAA and AA, keep any single company to a small share of the total, and avoid anything below investment grade.

AAAHighest safety. Large PSUs, top companies.
AAHigh safety. Small step down from AAA.
AAdequate safety, more sensitive to bad years.
BBBModerate safety. Lowest investment grade.
BB and BBelow investment grade. Real risk of delay.
C and DVery high risk, or already in default.

Tax-free bonds

Tax-free bonds, bought second-hand

No fresh tax-free bonds have been issued for several years. The ones issued by government-backed infrastructure and power companies are still listed and trade on the stock exchanges.

Interest is tax-free

The yearly interest is exempt from income tax, so a 5.5% yield works like roughly 7.9% taxable for someone in the 30% slab (before cess). Capital gain on selling is still taxable.

You pay the market price

Most of these bonds trade above ₹1,000 because their old coupons are higher than today's rates. What you earn is the yield at your purchase price, which is lower than the printed coupon.

Long tenures, thin trading

Remaining series mature over the next several years, some as late as the mid-2030s. Some series trade only a few times a day, so a large order may need patience or a limit price. Plan to hold till maturity.

Who they suit

People in the 30% slab with a lump sum they will not touch for 5 to 10 years, who want steady, tax-free income and high credit quality.

Tax treatment described as per rules as of 2026, check current rules. You need a demat account to buy listed bonds.

Laddering for income

Split one lump sum into rungs that mature year after year

Instead of putting ₹10 lakh into one 5-year bond, a ladder spreads it across five bonds maturing in years one to five. Each year one rung comes back. You either use it or reinvest it at the far end of the ladder at whatever rates are then on offer.

Money comes back every year, so you are never forced to sell a bond at a bad price.
If rates rise, each maturing rung is reinvested at the higher rate. If they fall, only one rung is affected at a time.
Spread rungs across different issuers so one problem does not hit the whole income.
Works well beside an SWP or corporate FDs for retirees who want predictable cash flow.

₹2LYr 1

₹2LYr 2

₹2LYr 3

₹2LYr 4

₹2LYr 5

Total invested: ₹10,00,000
Coupon on each rung: 7.5%*
Interest per rung a year: ₹15,000
Yearly income, all five: ₹75,000

*Assumed rate for illustration, same for all rungs to keep the sum simple. Real rungs will pay different rates. Interest is taxable at your slab.

Compare

Bonds next to the other fixed-income choices

None of these is better in every case. The right mix depends on how soon you need the money and your tax slab.

	Listed bonds and debentures	Tax-free bonds	Bank or corporate FD	Debt mutual funds
Income	Fixed coupon on set dates	Fixed coupon, tax-exempt	Fixed interest	No fixed payout; use SWP
Exit before maturity	Sell on exchange at market price	Sell on exchange, often thin	Premature withdrawal, with penalty	Redeem on any business day
Main risk	Issuer default, rate changes	Rate changes, liquidity	Issuer risk on corporate FDs	Rate and credit risk of holdings
Minimum	₹1,000 to ₹1 lakh per bond	One bond, at market price	Often ₹1,000 to ₹10,000	Often ₹500 to ₹5,000
Interest tax	Slab rate	Exempt	Slab rate	Gains at slab rate

Tax as per rules as of 2026, check current rules. Mutual fund investments are subject to market risks, read all scheme related documents carefully. Compare debt funds and liquid funds in more detail.

Before you buy

Five checks we run on any bond

Rating and outlook. Current rating, any recent downgrade, and whether the outlook is negative.
Secured or unsecured. And where you stand in the queue if the company runs into trouble.
Yield to maturity at today's price. Not the coupon printed on the issue.
Call or put options. A callable bond can be repaid early, usually when rates fall, which cuts your income.
Trading volume. If the bond barely trades, assume you will hold till the end.

Questions

What people ask us about bonds

Short answers. For your own numbers, send us a message.

Are bonds safer than equity mutual funds?

Bond prices usually move far less than shares, and a held-to-maturity bond from a sound issuer returns its face value. But bonds carry default risk, and a lower-rated debenture can lose money outright. Safety depends on the issuer, not on the word "bond".

Do I need a demat account?

Yes, for listed bonds and tax-free bonds bought on the exchange. If you already invest in shares, the same demat account works.

What happens if I need the money before maturity?

You sell on the exchange at the market price, which may be above or below what you paid, and some bonds trade rarely. That is why we suggest keeping your emergency money in a liquid fund or savings account, not in bonds.

Is a 12% debenture a good deal?

A coupon far above top-rated bonds of the same tenure is the market telling you the risk is higher. Check the rating, whether it is secured, and how much of your money is in it. We would rarely put income money there.

Bonds or a debt fund for a retiree?

A bond ladder gives known dates and amounts. A debt fund gives daily liquidity and spreads credit risk across many issuers, with income drawn through an SWP. Many retirees use both. See our page for senior citizens.

A fixed coupon, a known end date. Read the rating before the rate.