SBI bonds @9.95% , Who should buy ?

SBI retail bonds is the latest offer from State Bank of India. These saving bonds issue will open from 21st Feb 2011 and closes on 28th Feb 2011 . These bonds are offering attractive interest rates to investors which are better than even fixed deposits, however it does not suit every kind of investors . Only if you are looking at income generation, these bonds will be good for you, but if your aim is capital apprecitation, you will benefit by investing in PPF instead of these bonds. . Lets look at the details of these retail bonds.

SBI retail bonds

Tenure and Interest Rates

These SBI bonds will come in two variations. The first one is with 15 yrs maturity period offering 9.95% interest and the other option is with 10 yrs maturity period offering 9.75% interest rate. Note that these interest rates are applicable only if you are investing less than Rs 5 lacs (retail category). If you invest more than Rs 5 lacs then you will come into the category of non-retail investors for whom the interest rates are 9.30 percent for a 10-year bond and 9.45 percent for 15 years bond. The interest offered by these bonds are payable yearly, which makes them a great alternative to Bank Fixed Deposits . Following is an illustration which will clear a bit about how it works.

Ajay invests Rs 1,00,000 in 10 yrs SBI Retail bonds. He is entitled for 9.75% interest each year. So he will get Rs 9,750 per year for next 10 yrs . Note that each year this interest amount of Rs 9,750 will be added to his income and he will pay the tax on it accordingly as per his tax slab. He can sell off these bonds on stock exchange incase he is getting a good deal . One more thing which can happen is that SBI can force him to sell off the bonds back to them if SBI exercises their “call options” , which we have talked about below ! .

Call option

There is something called “Call Option” in these SBI bonds. For people who are familiar with “Futures and Options” , they know that a Call option is nothing but “Right to Buy” . So as per this call option, SBI has right to buyback these bonds from you and terminate the contract with you much earlier than the actual maturity.

If they choose to “exercise” the call option, SBI will pay the principal back to you. For 15 yrs bonds, the call option can be exercised in 10th yr and for 10 yrs bonds, the call option can be exercised in 5th yr. Note once again that it’s the right of SBI , not yours! .  For example, if you buy 15 yrs bond in 2011 , then if SBI wants to buy back the bonds after 10 yrs which is year 2021, they can do it. In which case, they will pay back the principle amount to you and close the contract.  But incase they dont want to do it, they will continue the bond and you cant do anything :).

How to Apply for SBI Retail Bonds

SBI retail bonds summary

There is no way to apply for these bonds online. You will have to physically go to SBI Bank and get the form from there and fill it up  (See the list of all the designated branches of SBI in PDF and EXCEL format , thanks to Babu for providing the list) . However these bonds will be issued in demat form only and therefore you will need to have demat account for buying these Savings Bonds from State bank of India. So be clear on two points

  • You need to have demat account to apply for these SBI Bonds
  • For applying you need to go to SBI Bank Branch and fill up the form , there is no way to apply online

Listing on Stock Exchange

One great thing about bonds is that they are listed on stock exchange so that you can buy and sell them in secondary market too incase you want to exit from it before the maturity. SBI retail bonds will also list on stock exchange after 1 month of the issue, after which you can buy or sell them on stock exchange. Last time when SBI came with similar issue, the buyers benefited a lot because the bonds listed at 5% premium on the first day itself, so there was an instant 5% gains for those who bought these bonds. However there is no guarantee that it will happen again.


The interest which you get from these bonds will be taxable. The interest will be added to your salary and taxed accordingly. Also these bonds do not give you any tax benefits on investments amount and are not covered under sec 80C . So effective return for these bonds will be much lesser for investors in 20% and 30% bracket post-tax. Watch this video on 7 tips of saving tax

Should you Invest in these bonds ?

So the main question any one will ask is “Should I invest in these bond ?” . It would depend on your goal as an investor . Just by looking at 9.95% you cant say that its the best investment. Note that the interest payout if yearly . Its not compounded like your PPF or FD’s . Which means  that the returns do not earn anything on it later , but its paid out to you.

So incase your goal is to generate yearly income at decent rates , It would be a nice investment. However if your goal is capital appreciation and you are looking at growth of your investments, these bonds would not be the best option . Note that even PPF would give more money to you at the end. Below is a chart which shows yearly amount you have got by the end of each year.

SBI bonds vs PPF

SBI bonds vs PPF

You can see that in case of PPF you are having more money with you even though the interest you get on it is just 8% because of compounding of money which is happening there .. However in case of SBI bonds , its not the case . Here the reinvestment of those yearly payouts is not taken into consideration . So the point here is that if you want yearly income , only then these bonds make sense.

What about interest rates in future ?

But the only suspense is what will be the interest rates in coming years ? What you don’t know is how interest rates will move in long-term and if interest rates offered by these bonds will look attractive in future? SBI might not be too dumb to offer these returns for such a long-term. Here is an except from Deepak Shenoy …

“why is SBI doing this? They don’t need to. They’re really smart people. Let me reiterate that. SBI has extremely smart people. If they could have offered a lower rate, they would have. That means this is actually a low rate compared to what they expect rates to go to. Meaning, there will be more rate hikes, and the 9.95% that looks good now, won’t look so great if you can get, say, 12% outside. (Don’t tell me 12% is out of reach, please. Even 10% was out of reach a couple of years ago) So that’s the risk – the feeling of regret if rates go up to 12% – in fact, you will think of it as a “loss” because the market value of the bonds will be below par, in that case. But if you have a different view on interest rates or can swallow such regret, go ahead.”Excerpts from Deepak Shenoy on his blog post.

Some Great Advice from Experienced Investor

Incase you are going to buy these bonds, you need some real life tips.  One of the readers Mr. Sundar shares some good and worthy points based on his experience of applying in these SBI bonds in 2o10. Read it below …

1. Apply in retail quota and do it on the first day. It is first come first depending upon the day. I applied for HNI Quota and failed. Retail gets preference over HNI. Read the offer document carefully.

2. Those who apply for 15 year bonds gets first preference over 10 year bond applicant. Read the offer document carefully. So don’t apply for 10 year if you want to improve your chances of allotment.

3. SBI Bonds are listed on the NSE as N1 and N2. Go to NSE Website and search for SBI equity. You will get SBI, N1 and N2. Trading per day is not that good. 15 year bonds are trading with a premium of 4% (N2)and 10 year (N1)at 2.5% as on yesterday.

4. On the whole this offering is good. But if you are looking for holding it upto maturity you will be shocked to know that the gains will be treated as interest and not as capital gains. So it will be better to sell this bond in the market in which case it will be treated as capital gains on Debt Funds. Unfortunately the trading is small and only small lots can be sold on per day basis. See the trading pattern on NSE.

Other Features

  • There is no Loan facility on these bonds. You will not be able to pledge these bonds for taking the loan.
  • The minimum investment is Rs 10,000 and maximum is Rs 5,00,000 for retail investor.
  • NRI and PIO can’t apply for these bonds
  • CRISIL has assigned a rating of “AAA” to these bonds which comes into “safe” category .

Comments ? Have I missed anything in the article which you want to point out ? Are you investing in these bonds ?

95 CommentsAdd Comment

  1. Hi Manish !
    One more excellent article from you..thanks a lot.Some banks like karur vyasya are offering very good interest rated for less years say 2 years.Even these bonds did not have any tax exemption.Interest rates will surely raise in future years right !
    Then I wonder why any body should go for them?
    What do you say?

    with Regards,

    • RaviShankar

      Thanks .. Its a good point and worth thinking that why one should go for them .. You can always doubt it and not move forward . But for retail investor , it might look like a good option . You always have an option to sell it off at secondary markets if you get good price :)


    • Its nothing to do with tax season . SBI came with one of the issues last year and as per their CEO they plan to come up with such issues each quarter or atleast half year based on the price discovery from stock market .


      • mithlesh

        Probably because these were a big hit last time and there are crores of people in india who think anything offered by SBI will be an excellent investment. I would rather put my money in a fixed deposit rather than investing here.

          • mithlesh

            Manish… I will not like putting my money locked for 10 years atleast. If i go for fixed deposit, i can atleast break it which may not be possible here. One more thing is interest rate can go higher as well from here. If i had to go for something like this, i will put in a fixed deposit where i can break if i want( there may be some penalty ofcourse).

            Thats my personal opinion of course and i am not a financial expert :)- I am just another poor retail investor.

            • Mithilesh

              You are thinking right , You are choosing your requiremnet first and then the features of product which is a good thing .

              If liquidity is that important for you, better put money in FD or i would say Debt funds


    • Shashank

      As you will have demat account ,you will be able to see these bonds in your demat account and you will be able to sell it online on stock exchange .. You cant be sure of any listing gains . It might be there or it might not be !


        • shashank

          manish one more query, if these bonds r easily tradeable in stock exchange as i may be buying it only for the listing gains.
          no plans to keep it for 15/10 years.

          • Shashank

            You cant rely on that . What if there is no listing gains ? What if there is listing gains, but there are no enough users ready to buy it ? how many people do you think will be ready to buy it from there after 1 month when they have not even applied for it ?


      • Krishna


        Does the price of the bond move up when the interest rates go higher then it is better to go for FD rather than this you have the flexibility to choose the bank upon interest rate?.


        • Gopal

          Krishna, When interest rates go up the bond price moves down. Its like a see saw! Otherwise, why will people come and trade the bonds?

          And since this is a callable bond, you (ok, rather I) never know how the prices would behave when the term reaches 5 or 10 yrs.. There are too many ifs and buts, I would go for a monthly income plan instead of this!

          And the fact that they have made it callable indicates that they expect interest rates to go up further. (My understanding)

  2. Mitr Singh

    Dear Manish,

    What about interest ??

    “if you buy 15 yrs bond in 2011 , then if SBI wants to buy back the bonds after 10 yrs which is year 2021, they can do it. In which case, they will pay back the principle amount to you and close the contract. “

      • S S

        In case SBI decides to withdraw the bonds they will return the principle only? What about the interest for holding period? As far as I understand from various sources its only principle. Pls clarify.

        • SS yes its only principle, because you will be paid the interest yearly ,Anyways if they want to withdraw it , it will be after 5th yr is complete and you are paid the interest . If they withdraw it that time , then you get principle , else they dont


  3. Mrigank Rathi

    Hi Manish,

    These are good bonds and an alternate for the person who intend to invest in Senior Citizens Saving Scheme. The effective return on SCSS is 9.3% while he gets close to 9.75% for 10 yrs & 9.95% for 15 years. Additionally if the interest rates fall in next 5 years then he can get a premium on these bonds. There is no cap of any banks to provide, interest can be credit in any bank as per the individual choice.

    Only investment should be done looking at personal marginal tax.

    Mrigank Rathi

  4. Sundar

    Let me give you finer points for subscribing to SBI Bonds. This is based on my experience when I applied for the last offering in Oct. 2010.

    1. Apply in retail quota and do it on the first day. It is first come first depending upon the day. I applied for HNI Quota and failed. Retail gets preference over HNI. Read the offer document carefully.

    2. Those who apply for 15 year bonds gets first preference over 10 year bond applicant. Read the offer document carefully. So don’t apply for 10 year if you want to improve your chances of allotment.

    3. SBI Bonds are listed on the NSE as N1 and N2. Go to NSE Website and search for SBI equity. You will get SBI, N1 and N2. Trading per day is not that good. 15 year bonds are trading with a premium of 4% (N2)and 10 year (N1)at 2.5% as on yesterday.

    4. On the whole this offering is good. But if you are looking for holding it upto maturity you will be shocked to know that the gains will be treated as interest and not as capital gains. So it will be better to sell this bond in the market in which case it will be treated as capital gains on Debt Funds. Unfortunately the trading is small and only small lots can be sold on per day basis. See the trading pattern on NSE.


  5. Anand

    The fact that the interest is taxable is a put-off. Also, you don’t get the power of compounding. Why not invest in PPF then which gives you interest-free 8% ?

  6. Sundar

    Please check if the Interest payable has two options like cumulative or annual. In their last offering in Oct. 10, they had two options for each of 10 and 15 year Series.

    I think there will be again two options this time as well.

    Please note only cumulative option is listed in NSE so far for Oct. 10 offering.

      • I am still not convinced .. There is no resource which mentions that their are two options :( .

        I want to trust your broker, but would like to see it somewhere . Did you find any resource ?


        • Sundar

          I am 200% certain that in Oct. 2010, I applied for cumulative option. So I assume the same options will be available this time as well. If you go for cumulative and sell in the market say after 2 years you will get double indexation benefit like FMPs. That is great. But if you see the price at which Oct. bonds are trading at 4% premium for 15 year bond that gives annulised return of 12% p.a. from Oct. 2010. Mind you since Oct. interest rates have hardened but these AAA rated bonds have not fallen in value. This means market rates these bonds highly. So I dare to say that Feb. Bonds will also deliver 12% return and it is great with double indexation. No FMP will give you this return.

        • Sundar

          My broker was to deliver the application form today evening. But he did not. But he has the form in his office and he said cumulative option exists. Tomorrow I will get the form and will submit on Monday. One thing worries me a little bit. For the Oct. Series, one year since the dae of allotment will fall some time in Nov. 2011. At that time Retail investors may cash in on the indexation benefits and may bring down the price in line with market rates (??). Or will it be absorbed by the HNIs, I don’t know. But I am applying anyway as I will hold till I get a good price may be after few years. But I will not hold it till maturity for tax reasons.

          • Sundar

            Ok , can you send me a screenshot of the form or online pdf incase you can , I want to see if it is there , I read an article on livemint today which mentioned that only yearly payment option exists which makes it a non-cumulative product and hence compounding is not possible , if cumulative option is there , It would be great!


  7. Giridhar

    Thanks for the good information Manish.
    Even at the height of liquidity crisis the FD interest rates didnt cross 11%. May be it is safe to assume they wont cross it again and there is every chance that they will go down. I had made FDs with axis abnk at 11% for 500 days (that was the tenure avaialble with 11%) and when they got matured I had to put them in 7.5% FDs. Whereas with these bonds, same interest rate is assured for 10 or 15 years.
    One thing to be noted is FDs give interest quarterly and can be compounded. With these bonds, it is not clear if we can compound the interest. If not how do they give interest – is it into bankaccount linked to demat or …..Manish may clarify on this.

  8. TCB

    Dear Manish,

    Can you please tell me whether HNI / QIB investor would be allowed to buy 9.95% Bond after listing ?



  9. TCB

    Dear Manish,

    QIB / HNIs are eligible to invest , agreed, but they will be issued the bonds at 9.3 & 9.45% coupan. My question was ‘Can QIBs / HNI buy the bonds which are issued to retail (at 9.75% & 9.95% coupan) after listing ?’ In other words, would QIBs / HNI be restricted from buying bonds bearing 9.75% & 9.95% coupan (which are issued only to retail), from the stock exchanges after listing ? The price of 9.75% and 9.95% bonds on listing will depend on this. Retail can expect higher listing price of their bonds, if QIBs are allowed to purchase the bonds issued to retail (i.e. 9.75% & 9.95%).

  10. Jagadees

    Hi Manish,
    I guess the interest rate for the SBI bonds are priced attractively to encourage more retail participants in the bond market. As we all know the debt market is shallow and under penetrated in india. I see this move to create vibrant debt market by pricing attractively. SBI indeed planned to raise capital via bonds every quarter. I dont think nothing much to read about the future interest rate movement from this. Even if the interest rate rises 100/150 basis point in short term, it wont stay there for long term. Hence i would say this bond issue as a good debt component for long term investor or for people looking for annual income.


    • Jagadees

      Yes .. but again I would say that if you want to gernerate yearly income , then these bonds are good , but if you want capital appreciation , then not the best one as there is no compounding effect :)


  11. Murli

    Hi Manish,
    It’s a good article but I do not agree with your view on conclusion that returns on the bond being lower than PPF. Since this is based on your assumption that the yearly interest on bond is not invested elsewher which is incorrect. If the interest on bonds received every year is reinvested in Recurring Deposit (which I assum will provide at least 8% return) then the total amount at the end of 15 year would be far greater than PPF. Please find my comparative chart.

    SBI with RD PPF
    109950 108000
    120696 116640
    132302 125971
    144836 136049
    158373 146933
    172992 158687
    188782 171382
    205834 185093
    224251 199900
    244141 215892
    265623 233164
    288822 251817
    313878 271962
    340938 293719
    370164 317217

    • Murli

      Yes , the assumptions here are that its not invested . However did you look at taxation also , the interest which you get each year is 9950 , but it will be added to your salary and taxed , so for someone in 30% bracket , he will be left with just 70% of 9950 . now if you consider investing the money in RD , does it outperform PPF ?


  12. Hi Manish,
    Very informative article indeed!Thanks a lot. I have the same view as Murli’s,and I am not in the 20% or 30% tax bracket,so do u think it will be a good investment option for me? and one more thing it’s one of the alternatives to company f.d.,bank f.d. and p.p.f ,not that people should not put money in them but this is another lucrative and safe option they have apart from those instuments.

  13. Krish

    I am not sure why SBI chosen to raise the funds through high cost bonds. I hope SBI did due diligence. There are significant additional costs associated with bonds issue (bond manager fee, application processing, allotment, cheques refunds, annual interest process, SEBI reporting, bond listing). Hence the net cost of funding could be anywhere between 12-15% for the SBI for 15 year tenure. Even at 15% lending rate it would just break even. The predominant loans i.e. home & auto loans are lower than this rate. Only personal loans seems to be the option and SBI is not aggressive in this segment. Overall bond issue from SBI is not a good news for shareholders and could affect the bottom line in future results.

  14. Rakesh


    Very good article.
    I won’t be investing in these bonds due to the longer tenure. I would rather invest in FD where i am getting 9.5% for a year. There is more likely chance of interest rates going up in the future, so i would not want to block my money.


      • Sohil

        Interest rates wont be up for eternity in 1-3 years after it will start coming down.Also i see no reason fd interest rate touching above 12% in any case.That will happen in extreme liquidity and also if it does the tenure of such fd wont be more than a year or 2.

  15. Sohil

    I understood the concept.But since it doesnt support 8th wonder of this world and since its a long term product(i wont go for it).

    But somewhere in posts and in article i read that it got listed at premium.I read 5% on Et site.And someone mentions thats above the rate of return we get.So does this means i buy the born and say again this bond lists at 5% premium .Would i be able to sell the bond within a year?Or its just that to buy from market i have to pay the premium .

      • Sohil

        Sorry did not got the point why it depends on interest rates?

        Just read on mint in grey market its offering 320 bucks premium on 10000.16k on 5 lakh.

        That is 3.2% annual return within a month or two when listed.

        People suggesting to go for it and invest the interest some where else as it doesnt suggest compounding.

        But one thing i fail to understand is its obvious when economy comes on track interest rates will start falling from 10,11 12% back to 7,8%.Than how come rate of bonds will increase.Does this means the premium will widen?

        • Sohil

          Understanding interest rates is not that simple as you have mentioned . You cant tell that for next 10 yrs the interest rates will come down only . So its not sure which way it will move .

          If its said that in grey market there is some premium , it might happen that the bonds will list with premum , its your personal call if you want to take the risk or not . Remember that when Reliance power IPO came , even it was on premium in grey market. But you know what happened .


          • Sohil

            Agreed.But i have data of last 5 years of my banks where i have seen interest rates on fd at 10.5% and same fd i kept for 7.5% some times back and now the same is being offered at 9.25% .One cant bet it will be always above 9.3% annually that was my point.Also if rates go say at 12% in bank fds still this bond will give same returns 9.3% .

            As i said i wont be betting on this bonds.I can easily get those returns in shares i feel.But ill suggest people who know how to invest and where to invest than only put your money in stocks.

            But still the question i failed to understand is how come rate of bond increases if fd rates go down.ALso this rate going up is on trading market?

            • Sohil

              Its not FD interest , but general interest rates declared by the RBI . If the interest rates go down , say for example 7% , then these bonds will become attractive for investors , and people will buy them from secondary markets , but SBI will exercise their option of “call-option” and withdraw it .

              If interest rates go up , then these bonds will become unattractive for investors but for SBI it would be a good idea to continue these .

              I would suggest initiating a discussion on the forum to know more on this now


  16. Aliasger

    Fantastic Comparision Great work done, the explanation given hera i can tell everybody even not known by the some reputed Brokers also, i have faced it……intelligent work.

  17. sandeep

    PPF limit is 70K per year so we should compare 70K in PPF and rest 30K in other instruments if we are comparing one lakh in SBI bonds vs. PPF.

  18. Bhavin Gandhi

    Can anybody Explain me why one should go for a debt instrument for a long term ? Why shouldnt go for an STP in mutual fund?

  19. Rohit

    Very nice & informative write-up. If we invest in Bank FDs with Re-Investment option (interest not taken, i.e. Cumulative Option) & where interest is quarterly compounded, what happens to the maturity vale i.e. Total Interest earned? Is the interest earned annually taxed on accrual basis or the whole interest is taxed in the year of maturity, or is there capital gain tax involved? Kindly give details.

  20. Mandar


    These bonds will be listed on Stock Market then how interest on it will becorme taxable as FD? Also you may have rightly pointed out that compound interest in PPF/PF may give more returns on 15 yr window but you are missing one point. One can easily invest interest earned every yr in other savings intruments available to earn more income. Your capital is alway secured.
    Let me know your thoughts.


    • Mandar

      What has listing on stock exchange to do with taxation ? Is there a rule that anything which is listed on stock exchange are not taxed ?

      Also , I didnt miss the point that the amount got yearly can not be invested , the first point is that if you get it each year , its taxed first and only then you can invest it in something .

  21. SK patil

    Hi, Manish,
    really good informative and good comparative between SBI v/s PPF,



  22. Sun

    can i put 500K in ppf in name of myself and mywife? NO…. Now does your PPF vs SBI bond comparison makes any sense to me? NO.

  23. Shiv Kukreja


    IFCI Ltd. (BSE:500106 NSE:IFCI) has now come out with its Tier II Bonds Issue fetching 10.75% interest. The issue is quite similar to the SBI Bonds Issue. IFCI Bonds are going to trade on BSE upon listing.

    Key Points of the Issue are:

    > Interest Rate of 10.75% p.a. (15 Years) & 10.5% p.a. (10 Years), which makes the issue quite attractive
    > Easy liquidity as the bonds are going to list on BSE
    > No TDS
    > Issue Size: Rs. 150 Crores with a “green-shoe option” to retain over-subscription
    > Bonds will be issued in the Demat mode only

    The bonds are most suited to those investors who want to earn better interest on their investments as compared to Bank Fixed Deposits. Issue opens on June 1st & Closes on July 15th but its expected that the issue will get closed much before July 15th as & when IFCI achieves its target.

    To invest in IFCI Tier II Bonds (10.75% or 10.5%) or for any other info you can Call/SMS us at 9811797407 (For Delhi, Gurgaon & Noida).

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