10 Different Types of Bonds in India That You Must Know

Have you ever thought about growing your money without taking on too much risk? Bonds might be the answer. They’re a trusted option for investors looking to earn regular income while keeping their capital secure.

When you invest in a bond, you're essentially lending money to a government or a company for a set period. In return, they agree to pay you interest, known as a coupon, at fixed intervals and return your original amount when the bond matures.

Understanding the various types of bonds available in India helps you choose investment options that match your income needs, risk appetite, and long-term financial goals.

What Is a Bond and How Does It Work in India?

Consider a bond as a formal IOU issued by the borrower (government or company) to the lender (investor). The key features of bonds include:

Coupon Rate: This is the fixed or floating interest rate the issuer pays you, typically expressed as a percentage of the bond’s face value. For example, a bond with an 8% coupon pays ₹8 annually for every ₹100 invested.
Tenure (Maturity): The length of time until the issuer repays the principal. Bonds can range from short-term (less than 3 years) to long-term (10 years or more).
Payment Frequency: Interest payments can be made annually, semi-annually, quarterly, or at maturity, depending on the bond type.

Now, let's explore the 10 main types of bonds you should know about, each with unique characteristics and suited to different investor profiles.

1. Government Bonds

Government bonds are issued by the central or state government when they need funds, for example, to build infrastructure or manage the budget. These are among the safest investments because they are backed by the government.

Why they’re a good option:

Backed by the government, it is very low-risk
Easy to buy and sell (high liquidity)
Some offer tax benefits
Help diversify your investment mix

Ideal for: Risk-averse investors, retirees, and anyone looking for steady income and safety.

2. Corporate Bonds

Companies issue corporate bonds when they need money for things like expansion, new projects, or working capital. These bonds offer higher interest (coupon) rates compared to government bonds to make up for the added risk.

Why they’re a good option:

Higher returns (usually 8–14%)
Steady income from regular interest payments
Adds variety to your portfolio
Actively traded—so easy to sell if needed

Ideal for: Investors who want better returns and can handle moderate risk.

3. Fixed-Rate Bonds

Fixed Rate bonds pay a set interest rate for their entire term. Think of it as a steady paycheck—great for those who like knowing exactly what they’ll earn.

Why they’re a good option:

Stable, predictable income
Low risk and minimal price swings
Great for long-term financial planning (like retirement)

Ideal for: Conservative investors who prefer consistent income with low risk.

4. Floating-Rate Bonds

Floating Rate bonds don’t stick to one interest rate. Instead, they adjust at regular intervals based on market benchmarks, such as the repo rate.

Why they’re a good option:

Interest income rises if market rates go up
Helps protect against inflation
Can offer better returns in a rising interest rate environment

Ideal for: Investors who want protection against inflation and interest rate changes.

5. Callable Bonds

Callable bonds can be “called” or redeemed early by the issuer, usually when interest rates fall. This helps the issuer refinance, but the investor may need to reinvest sooner than expected.

Why they’re a good option:

Offer higher interest to make up for the call risk (up to 14%)
Can gain in value if not called early
Regular income until maturity or early call

Ideal for: Seasoned investors who can manage reinvestment risk and want higher yields.

6. Puttable Bonds

These bonds give you, the investor, the right to sell them back to the issuer before maturity. That means more control, especially during uncertain times.

Why they’re a good option:

You can exit early if needed
Protects you if the issuer’s credit weakens
Often offer better returns than bonds without this feature

Ideal for: Cautious investors who value flexibility and want to reduce risk.

7. Inflation-Linked Bonds

Inflation Linked bonds adjust both interest and principal based on inflation indicators, such as the Consumer Price Index (CPI), ensuring your money retains its value over time.

Why they’re a good option:

Protect your return from inflation
Guaranteed interest above inflation levels
Helps stabilise your portfolio in uncertain times

Ideal for: Long-term investors seeking inflation protection and stability.

8. Convertible Bonds

Convertible bonds start as regular debt but can be converted into company shares later, offering a mix of fixed income and stock market potential.

Why they’re a good option:

Earn interest while holding the bond
Gain from share price growth if converted
Lower risk compared to directly buying stocks

Ideal for: Investors who want the safety of bonds but don’t want to miss out on equity gains.

9. Perpetual Bonds

Perpetual bonds don’t have a maturity date. They pay interest forever, but you never get the principal back.

Why they’re a good option:

Lifetime income stream
Great for long-term investors who don’t need the principal

Ideal for: Investors focused on continuous income and not concerned about principal return.

10. Zero-Coupon Bonds

Zero-coupon bonds don’t offer regular interest payments but provide a lump sum at maturity, making them ideal for goal-based planning.

Why they’re a good option:

No reinvestment worries
Receive a lump sum at maturity
Ideal for planning future expenses (like education or a house)

Ideal for: Long-term, risk-averse investors have a specific financial goal in mind.

Features of Bonds

Before exploring bond categories, it’s important to understand their core features:

Coupon Rate: Fixed or floating interest paid periodically.
Maturity/Tenure: Duration of the bond, ranging from short-term to long-term.
Face Value: Nominal amount on which interest is calculated.
Liquidity: Ease of buying or selling bonds in the secondary market.
Credit Rating: Reflects the issuer’s ability to repay, helping investors make informed decisions.

Understanding these features helps investors navigate the classification of bonds and choose the appropriate types of bonds for investment.

Advantages of Bonds

The main advantages of bonds include:

Predictable Income: Regular interest payments support financial planning.
Capital Preservation: Especially government bonds with low default risk.
Portfolio Diversification: Reduces overall investment risk alongside equities.
Tax Benefits: Certain bonds, such as tax-free bonds, offer exemptions on interest income.
Liquidity: Some bonds can be sold easily in secondary markets if funds are needed.

These benefits make bonds a reliable option among the different types of bonds in India.

Limitations of Bonds

Key limitations of bonds include:

Interest Rate Risk: Fixed-rate bonds may lose value if market rates rise.
Credit Risk: Corporate bonds depend on the issuer’s financial health.
Inflation Risk: Returns may be eroded over time, especially for fixed-interest bonds.
Callable Bonds: Can be redeemed early by the issuer, reducing expected income.
Lower Returns: Bonds typically offer lower growth potential compared to equities.

Awareness of these limitations helps investors choose the right types of bonds for investment and balance their portfolios effectively.

Things to Consider Before Investing in Bonds

Before investing, evaluate factors that affect returns and risk across the different types of bonds:

Assess Risk Tolerance: Government bonds are safer, while corporate bonds offer higher returns but carry moderate risk.
Determine Investment Horizon: Decide whether you need short-term liquidity or long-term growth.
Interest Rate Environment: Floating-rate bonds adjust with market rates, whereas fixed-rate bonds may lose value if rates rise.
Inflation Protection: Consider inflation-linked bonds to preserve purchasing power over time.
Check Credit Ratings: Review the issuer’s credit rating to minimise default risk.
Align with Financial Goals: Choose bonds that match objectives like regular income, retirement planning, or wealth preservation.

Carefully considering these factors helps investors make informed decisions when selecting types of bonds for investment in India.

How to Invest in Bonds in India

Investing in bonds in India is straightforward with the following steps:

Open a Demat Account: Required to hold bonds digitally and access secondary markets.
Explore Bond Options: Choose from government, corporate, tax-free, and inflation-linked bonds depending on your risk appetite.
Evaluate Features: Check tenure, coupon rate, and issuer credit rating before investing.
Place Buy Orders: Bonds can be purchased online or through banks and brokers.
Receive Payments: Interest and principal are credited directly to your bank account at scheduled intervals.
Monitor and Manage Investments: Bonds can be sold in the secondary market if liquidity is required.

This approach allows investors to confidently access the different types of bonds in India and build a diversified, income-generating portfolio.

Why Consider Bondbazaar for Your Bond Investments?

Investing in bonds can seem confusing, but Bondbazaar makes it simple and easy to understand. It gives you access to over 10,000 bonds, including safe government bonds and high-return corporate bonds—all through a user-friendly online platform.

You can buy and sell bonds with just one click. There are no account opening charges, no brokerage fees, and no maintenance costs. Your bonds are held safely in your demat account, and the interest and final amount are sent directly to your bank account.

With a combination of smart technology and helpful support, Bondbazaar offers a great way to earn fixed returns of 8–14%, requiring less effort and providing more confidence.

Must Read - Why Bonds are the safest investment options right now

Conclusion

Bonds aren’t just financial instruments—they’re practical tools designed to support real-life financial goals. Whether you're drawn to the safety of government bonds or aiming for higher returns through corporate, callable, or convertible options, there’s a bond type suited for every kind of investor.

Understanding a few key concepts—like coupon rates, tenure, payment frequency, and special features such as call or conversion options—can go a long way in helping you make smart, informed decisions.

Whether your priority is regular income, inflation protection, or long-term growth, bonds offer flexible and reliable ways to build your wealth. With Bondbazaar, accessing and managing these investments becomes simple, transparent, and hassle-free, providing you with the tools and confidence to build a balanced portfolio.

Frequently Asked Questions

Q1. Which type of bond is safest to invest in India?

Government bonds like G-Secs and Treasury Bills are considered the safest due to sovereign backing.

Q2. What are tax-free bonds in India?

Tax-free bonds are issued by government-backed entities, where the interest income is exempt from income tax under Section 10(15)(iv)(h).

Q3. Can I buy bonds online in India?

Yes, platforms like Bondbazaar.com allow you to buy bonds online with zero brokerage and direct settlement in your demat account.

Q4. Are bonds better than FDs?

Bonds can offer higher returns and better liquidity than fixed deposits, especially corporate and perpetual bonds.

Q5. How do bonds work?

Bonds are like loans you give to a government or company. In return, they pay you interest at regular intervals, known as coupons, and return your principal when the bond matures. Depending on the type of bond, you may earn a fixed interest or a rate that changes with market conditions. Bonds are a way to earn a steady income while keeping your money relatively safe.

Q6. What are the most popular types of bonds?

The most popular types of bonds in India include government bonds, corporate bonds, tax-free bonds, fixed-rate bonds, and inflation-linked bonds. Each type serves a different purpose. For example, government bonds are safe, while corporate bonds may offer higher returns. Understanding the different types of bonds helps you choose the ones that match your income needs and risk appetite.

Q7. What is an example of a bond?

A common example is a 10-year Government Security (G-Sec) paying 7% annual interest. If you invest ₹100, you receive ₹7 each year as interest, and at the end of 10 years, your ₹100 principal is returned. This is a simple illustration of how bonds generate regular income while preserving your capital.

Q8. How to buy bonds?

Buying bonds is straightforward. You need a demat account to hold bonds digitally. Once you have one, you can explore government, corporate, tax-free, or inflation-linked bonds. Bonds can be purchased online through platforms or via banks and brokers. Interest payments and principal are credited directly to your bank account at regular intervals, making the process simple and transparent.

Q9. Are bonds a safe investment?

Bonds are generally considered safer than stocks. Government bonds are very low-risk, as they are backed by the sovereign. Corporate bonds carry moderate risk, depending on the issuer’s financial health and credit rating. Choosing the right type of bond based on your risk tolerance and investment horizon can help you earn steady returns while keeping your capital protected.

Q10. What is the safest type of bond?

Government bonds, such as Treasury Bills and G-Secs, are considered the safest type of bond in India. They are backed by the government, making the risk of default extremely low. These bonds are ideal for conservative investors looking for types of bonds for investment that offer stable returns with minimal risk.

Q11. What is the maturity period for medium-term bonds?

Medium-term bonds typically have a maturity period ranging from 3 to 10 years. They strike a balance between liquidity and returns, making them suitable for investors who want steady income over a moderate timeframe. Choosing medium-term bonds among the different types of bonds in India can help meet financial goals like planning for education, property, or retirement.