State Development Loans (SDLs) Compare

Additional Useful Information

• When an investor purchases a bond, the issuing entity is bound by a legal contract wherein they are obligated to make interest payments as per the coupon rate to the investor.

• The prices of SDLs keep changing with a changing economic environment and government policies.

• Investing in SDLs is suitable for investors who desire regular passive income.

Returns *

• SDLs usually provide higher returns as compared to bank fixed deposits and other government bonds such as G-Secs, and T-Bills.

• SDLs do not guarantee any returns. However, the probability of negative returns are relatively low.

• Typically, SDLs can generate returns ranging from 7% to 8.5% per year depending on the duration for which they are held and the government policies.

Risk Level

• SDLs are considered low risk investments.

• SDLs have a credit risk associated with them. This means that if the company issuing these bonds default in their commitments, the investor can make losses on the investment. Since the institution issuing these bonds is a state, the credit risk is relatively low.

• SDLs become riskier during times of economic downturn. This is because the chance of the issuing institution defaulting on the interest payments are higher in these times. However, in times of downturn, these state government bonds are amongst the safer bonds available in the market.

• Based on the credit risk, all bonds are provided with a credit rating by a credit rating agency. This helps in determining how safe or risky the bonds are. Investors should analyse this rating to understand the risk more accurately.

Liquidity

• SDLs are liquid.

• They can be sold at any given time prior to maturity. However, it is possible that there may not be a buyer for the bond. There is no guarantee that the bond will be sold.  In this event, the investor continues to hold the bonds till maturity and earn the interest till maturity.

Interesting Facts

• SDLs are given a sovereign guarantee. This means that should the state ever default on the bonds; the principal amount is guaranteed by the central government.

• SDLs are also eligible for investment by Foreign Portfolio Investors (FPIs), subject to regulatory restrictions and conditions.

• SDLs can provide higher yields than other central government securities, although they also carry a marginally higher level of credit risk.

Tax Implications

• Earnings received from SDLs are taxable.

• Interest earned by investors from SDLs are to be added to their total taxable income and taxes are required to be paid as per the income tax slab.

• When investors sell SDLs prior to maturity, the difference between the Sale Amount and Purchase Amount is typically called “Capital Gain” or “Capital Loss” (if sale amount is lesser than the purchase amount).
• Situation 1 – If the SDLs are sold within a period of 2 years from investment, the Capital Gains earned (called Short Term Capital Gains) are to be added to the taxable income of the investor and taxes are required to be paid based on the applicable income slab.
• Situation 2 - If the SDLs are sold after a period of 2 years from investment, the Capital Gains earned (called Long Term Capital Gains) are taxed at 12.5% on the gains.

• There is no tax in case of “Capital Loss”.

Where To Invest

• https://www.bondsindia.com/state-development-loans.html

• https://mf.nipponindiaim.com/knowledge-center/what-are-debt-funds/state-development-loan