Public Sector Bank Bonds

Public Sector Bank Bonds in India 2026

Public Sector Bank (PSB) bonds are fixed-income investments issued by government-owned banks, such as State Bank of India (SBI), Bank of Baroda, and Punjab National Bank.

Banks sell these bonds to raise capital for business lending and to satisfy Reserve Bank of India (RBI) safety standards

What are PSU Bank Bonds?

PSU bank bonds are fixed-income investments issued by government-owned banks. When you buy one, you lend money to the bank. In return, the bank pays you fixed interest payouts and returns your original investment at maturity—or when the bank decides to buy it back early (via a call option).

Because these bonds count toward the bank’s mandatory capital safety buffers, they have unique rules compared to standard corporate bonds.

Key features:

• Early Repayment (Call Option): The bank has the right to buy back the bond and return your capital after 5 or 10 years, subject to RBI approval.
• Flexible Interest Payouts: If the bank faces severe financial distress, it can pause interest payments without officially defaulting on its debt.
• Capital Protection Risk: If the bank's financial health drops to a critical level, the bond can be permanently written off or converted into company shares to absorb losses.

A Simple Example

Suppose you buy a Rs. 1,000,000 face value. Bank of Baroda Tier 2 bond paying 8% per year, with 5 years left to maturity. Annual interest is Rs. 80,000. Over 5 years, the total interest comes to Rs. 400,000. At maturity, your Rs. 1,000,000 principal returns.

If you bought the same bond at a discount (say Rs. 980,000), you also pick up a Rs. 20,000 capital gain at maturity. Your overall yield-to-maturity would be higher than the 8% coupon.

Risks to Understand:

Two essential risks to keep in mind regarding public sector bank bonds:

1. Interest Rate Risk: Because these bonds have long or unending tenures, their resale value fluctuates. If overall market interest rates go up, the market price of your bond can drop.
2. Liquidity Risk: Some of these bonds do not trade actively in the secondary market. If you decide to sell before the bank redeems them, you may not get your expected price immediately.

How to Invest in GoldenPi

GoldenPi is a SEBI-registered Online Bond Platform Provider. The steps:

1. Log in to your KYC-verified account.
2. Open the Public Sector Bank Bonds section.
3. Filter by issuer, tier type, yield, call date, or maturity.
4. Read the offer document carefully, especially the coupon discretion and write-down clauses.
5. Pay through NEFT or RTGS from your bank account.
6. The bond enters your demat after settlement.

PSU Bonds Taxation

Interest is added to your total income and taxed at your slab rate. Once annual interest from one issuer crosses Rs. 10,000, TDS at 10% applies to listed corporate bonds under Section 193 of the Income Tax Act.

Bonds sold within 12 months are taxed at slab. Beyond 12 months, the long-term capital gain on a listed bond is taxed at 12.5% without indexation under the Finance (No. 2) Act, 2024.

Conclusion:

Bonds from public sector banks let investors put money into debt from India's largest nationalized lenders. The yields are higher than central government bonds because of credit risk and structural features, especially for AT1 perpetual bonds. The credit rating, the tier classification, and the specific features in the offer document (coupon discretion, call option, write-down clause) all matter.

For investors who understand the structures, this category offers a higher coupon than plain government securities.

GoldenPi keeps the listings updated. Live yields, call dates, and tier classification reflect the latest disclosures from each issuer.

last Updated: 8 Nov 2026