Top Government-Backed Bonds in India with Highest Yields

Government bonds in India are essentially loans that you extend to the central or state government, enabling them to raise money for large-scale infrastructure projects such as highways, power plants, water systems, and urban development. In return, the government commits to paying back the principal at maturity along with regular interest payments. Because these bonds are backed by the government, they rank among the safest investment options and are preferred by conservative investors seeking stability and predictable income.

Central government bonds—commonly called G-Secs—are issued through the Reserve Bank of India, while state governments issue State Development Loans (SDLs), which usually offer slightly higher yields due to marginally higher risk. Investors can conveniently buy these securities through RBI Retail Direct, stock exchanges, or even through their banking platforms.

For 2025, several government-backed bonds stand out for their attractive yields, strong ratings, and stable return profile. Among them, the Kerala Infrastructure Investment Fund Board (KIIFB) bond is particularly notable for offering one of the highest yields while maintaining a solid AA credit rating. The table below provides an at-a-glance overview of the top 10 government bonds, including their yield and credit rating.

Overview Table: Top 10 Best Government Bonds in India (2025)

Government bonds differ in many ways, but one of the most important distinctions lies between the coupon rate and the bond yield. The coupon rate is the fixed annual interest paid by the bond based on its face value, and it remains unchanged for the life of the bond. In contrast, the bond yield reflects the actual return an investor earns based on the bond’s market price, which constantly fluctuates. When a bond’s price falls, its yield rises, and when its price rises, the yield declines.

For example, if a bond with a face value of Rs 1,000 carries an 8 per cent coupon, it always pays Rs 80 annually. But if it trades at Rs 900, the yield increases to 8.89 per cent, and if it trades at Rs 1,100, the yield drops to 7.27 per cent.

Among the best-performing government-backed options, the Kerala Infrastructure Investment Fund Board bond remains a standout with a 9.53 per cent yield and strong AA rating. Established in 1999, KIIFB funds Kerala’s large-scale infrastructure programs including roads, energy projects, and water systems. These bonds typically mature between 2031 and 2035 and pay quarterly interest, making them appealing to investors seeking stable and relatively high returns with moderate risk. Another reliable pick is the Andhra Pradesh Mineral Development Corporation bond, which comes with a state guarantee and provides an 8.92 per cent yield. It allows investors to gain exposure to the mining sector while remaining within the safety of government-backed securities.

SDLs from Himachal Pradesh, Punjab, and Uttar Pradesh offer sovereign guarantees and provide yields ranging from 6.75 per cent to 7.51 per cent. These bonds channel funds into local infrastructure such as hydropower, agriculture, and expressway development. For investors who prioritize stability, these state-backed loans offer dependable returns with minimal risk. The GOI 10-year G-Sec is another core investment option, providing a 6.53 per cent yield with semi-annual interest payments, and is widely used as a benchmark for the Indian bond market.

Higher-yield opportunities come from utility and infrastructure-focused state entities. Bonds from the Tamil Nadu Generation & Distribution Corporation and the West Bengal State Electricity Distribution Company offer significantly higher yields—13.5 per cent and 11.95 per cent respectively—though with correspondingly higher risk. These bonds are suitable for investors who can handle volatility in exchange for elevated returns. The Punjab Infrastructure Development Board bond, rated BBB with an 11.7 per cent yield, also fits this category, appealing to investors with a stronger risk appetite. For those seeking a balance of safety and return from municipal infrastructure, the Greater Hyderabad Municipal Corporation bond delivers a 10.55 per cent yield along with a solid AA rating.

Types of Government Bonds in India

India offers various types of government bonds, each designed to meet different financial objectives. Fixed-rate bonds provide steady coupon payments, while State Development Loans typically offer higher returns than central government securities. Tax-free bonds—although no longer newly issued—remain attractive in the secondary market because their interest income is exempt from taxation. Zero-coupon bonds, issued at a discount and redeemed at face value, offer a unique structure with no periodic interest payments.

Advantages of Government Bonds

Government bonds carry several advantages for investors. They provide capital protection backed by government guarantees, ensure predictable interest income, and offer liquidity through the secondary market. Their low default risk, portfolio diversification benefits, and potential tax advantages make them suitable for conservative investors, retirees, and those looking to hedge against market volatility or inflation. They also fit well in long-term portfolios, especially when combined with gold-linked or inflation-indexed bond options.

Government Bond Taxation

Taxation on government bonds depends on the type of bond and the holding period. Interest earned on taxable government bonds is taxed according to the investor’s income tax slab, and TDS may apply. Capital gains from bonds held for less than one year are taxed at slab rates, while long-term capital gains on holdings above one year are taxed at 12.5 per cent without indexation benefits. Tax-free bonds, on the other hand, offer fully exempt interest income, improving their overall post-tax returns.

Disclaimer: The article is for informational purposes only and not investment advice.