Should You Invest in the RBI Retail Direct Scheme?
MAS Team | 26 February 2022
In November 2021, the Reserve Bank Of India (RBI)’s launched RBI Retail Direct Scheme, which has since been generating considerable interest among investors. With the commencement of this scheme, retail investors can now buy and sell government securities (G-Secs) directly through the RBI Retail Direct Portal.  Till this scheme was launched, retail investors could invest in government securities only through intermediaries like brokers or mutual funds .Beyond the small investor’s grasp till now, this vehicle offers another alternative to existing avenues like traditional insurance plans, small savings schemes and debt funds. 
G-Secs are financial instruments through which the government borrows money to support its financial requirements. So, when you invest in these securities, you are basically lending to the government and earning interest. 
In this blog post, we will explain RBI Retail Direct Scheme, its benefits, risks, and how you can use this RBI scheme.
RBI Retail Direct Scheme – What do you get?
As explained above, with the help of the RBI Retail Direct Scheme, you can now directly invest in government securities. Overall, there are 4 kinds of government securities you can invest in through the RBI Retail Direct platform:
1. Government of India Treasury Bills (T-Bills)
Treasury bills or T-bills are short-term debt instruments issued by the Government of India. So, through these instruments, the government borrows for a short-term period. Presently, the government issues these T-Bills in three tenors, namely, 91-days, 182-days, and 364-days.
2. Government of India Dated Securities (Dated G-Sec or government bonds)
Government bonds are long-term debt instruments issued by the Government of India. Through this, the Indian government borrows for one year or more.
3. State Development Loans (SDLs)
SDLs are long-term debt instruments issued by various state governments in India. Simply put, through SDLs, state governments borrow for one year or more. State governments don’t issue T-Bills. So they issue bonds that mature after at least 1 year.
4. Sovereign Gold Bonds (SGB)
SGBs are government securities denominated in grams of gold. They are substitutes for holding physical gold.
You can invest in these four kinds of government securities directly through the primary market as well as the secondary market. Investing via primary market means buying government securities through primary auctions when the Central government or any State government is freshly issuing or re-issuing their securities. On the other hand, investing in the secondary market means buying and selling G-Secs from other investors. So, it is similar to trading stocks in the stock market exchanges.
You can access the auctions through the RBI Retail Direct portal, whereas the RBI NDS – Order Matching System website will be the platform for buying and selling G-Secs in the secondary market. To access the primary and secondary G-sec market, you need to open a “Retail Direct Gilt (RDG)” account with RBI. A key benefit of opening and maintaining this account with RBI is that it is free of cost. Let us look at other benefits of investing directly in G-Secs through the RBI Retail Direct portal.
Benefits Of RBI Retail Direct Scheme
Low Cost
Before the RBI Retail Direct scheme was launched, it was not possible for retail investors to directly invest in government bonds.They had to go through brokers and it was not free of cost. Debt mutual funds and traditional insurance plans come at a cost. Second, direct investors can pick and choose specific bonds as per their cash flow needs. For DIY investors, this affords a degree of flexibility not available through other route. The Retail Direct Account does not involve any intermediary and is completely free of charge. Investors only have to bear the payment gateway fees.
The minimum amount for investment through the RBI Retail Direct platform varies for different government securities. For T-Bills, government bonds, and SDLs, the minimum investment amount is Rs. 10,000. On the other hand, the minimum investment amount for SGBs is the price of one gram of gold, which will keep changing as per the change in the price of gold.
Safe Short-Term Investment Through T-Bills
Treasury bills are the safest fixed-income investment option in India because they are issued by the central government. The yield in these instruments is predetermined, which means you are certain about how much return you will make if you hold T-bills till maturity. Thus, you can use T-bills as an investment option to park the short-term amount that you would need within a year.
Buy SGBs Anytime
The SGBs are usually issued every 2 or 3 months. If you miss subscribing during this time, you can buy SGBs in the secondary market. But for that, you need to have a demat account, which is not free. You need to pay a fee every year to maintain your demat account. With the introduction of the RBI Retail Direct portal, now retail investors even without a demat account can also buy SGBs in the secondary market.
However, it is not necessarily better than the others. Let us understand these limitations of investing through the RBI Retail Direct platform.
Limitations Of RBI Retail Direct Scheme
Not Easy To Exit Your Investments
As RBI Retail Direct is a new platform and the awareness is low, the liquidity (the ability of an investor to sell) will remain low, till the time enough buyers and sellers join the platform. So, if you decide to sell any government security before its maturity, you may not find a buyer easily for that security in the secondary market. Consequently, this non-availability of buyers for certain securities could result in a distressed sale (selling at a much lower price than its holding cost) and lead to a loss.
Government bonds pay out interest semi-annually or annually. Further, these can be sold at any time via the RBI portal. However, it is still early days. 
No Tax Incentives On Returns 
Taxability is another dampener. You stand to get no tax relief when investing directly in government bonds. Interest received is added to your income and taxed at your slab. So, at higher tax brackets, this avenue is quite inefficient. When you buy a government bond, you get paid an annual or semi-annual interest on the same. And that interest is fully taxable at your income tax slab rate every year. For example, say you earn 7% interest from any government bond and if you fall in the 30% income tax slab, your post-tax returns reduce to 4.67% Meanwhile, investors in debt mutual funds enjoy dual tax benefits.
Clearly, the absence of any tax incentives is reducing your net returns. On the other hand, if you invest in G-secs through a debt mutual fund, there is a way to minimise the tax outgo.
In the case of debt mutual funds, your gains are taxed only when you redeem. And as per current income tax rules, if you hold a debt fund for more than three years, your gains are taxed at 20% with indexation. Indexation benefit is the process through which you adjust the purchase price of an asset to account for inflation between the time you bought and sold it. So the applicable tax rate on your capital gains will be less than 20%.
However, if you redeem your debt fund units within 3 years, you do not enjoy any tax incentive. Capital gains from debt fund units held for 3 years or less are subject to Short Term Capital Gains (STCG) and they are taxed as per your applicable income tax slab rate. Thus, the tax applicable will be the same as directly buying government bonds.
Should You Invest In RBI Retail Direct?
If you are looking for safe investment avenues for your short-term goals, directly investing in T-Bills or 1-3 year government bonds can be a good option. G-secs are probably the safest investment options in the country if you hold them till maturity. And if you plan to redeem within 3 years, the tax rules are the same as debt funds.
On the other hand, if you are planning to invest in G-secs for the long term, then do take into consideration the post-tax returns. 
DIY investing in Gilts comes with own set of complications. Navigating the government securities market is not easy, especially if you are buying from the secondary market and don’t intend to hold the bonds till maturity. While G-secs carry no default risk, they are prone to interest rate risk (bond prices go down when interest rates go up and vice versa). In a rising interest rate scenario, these bonds can face sharp mark-to-market (MTM) losses if sold before maturity. This can test the DIY investor’s resolve. A sharp drop in bond value may unnerve some, prompting a hasty exit at a loss.
This means you might be better off investing in debt funds, where a professional fund manager invests in a diversified debt instrument portfolio on your behalf.
The average small investor will find it much simpler to take the mutual fund route and invest in a Gilt fund. These come with a diversified portfolio and can manage MTM volatility at their end. Target maturity debt funds adopt the ‘buy and hold till maturity’ strategy. This offers a similar experience to buying and holding government bonds, with predictable returns. By spreading across varying maturity funds, you can create a maturity ‘ladder’ as per your cash flow needs—at better tax efficiency than with individual bonds.