RBI Retail Direct Scheme

Government securities are the safest rupee investment available, and for years a retail investor could not easily buy one.

The route ran through somebody else's account. An investor had to hold G-secs through a bank's Constituents' Subsidiary General Ledger account, or through another Securities General Ledger account holder.

The RBI Retail Direct Scheme, launched on 12 November 2021, removed that middle step.

Any resident individual with a rupee savings bank account, a PAN and valid KYC documents can open a Retail Direct Gilt (RDG) account directly with the RBI, online, free of cost. Joint holding is allowed.

Through it they can buy government securities, Treasury Bills and State Development Loans. They can bid in primary auctions and trade in the secondary market on the RBI's own platform.

Interest and redemption money is credited straight to their linked bank account.

The old route and the new one.

Eligibility. Any resident individual with a rupee savings bank account, a PAN, and valid KYC documents.

What can be bought through the RDG account. Not only G-secs, but also Treasury Bills and State Development Loans.

How it can be bought and sold. Two routes, and both were previously out of retail reach:

1. Non-competitive bids directly in primary auctions — the investor places a bid without having to quote a yield.
2. Buying and selling in the secondary market through the RBI's own NDS-OM platform.

Money movement. Interest and redemption proceeds are credited directly to the investor's linked bank account, as they were under the CSGL and SGL route.

The underlying instrument's terms, from the same section. The minimum investment in a G-sec is Rs 10,000. There is no cumulative option — interest is paid out on pre-specified dates into the designated bank account, so a G-sec cannot be used to compound. Interest is not subject to TDS but is fully taxable. G-secs are benchmark securities in the bond market and tend to offer a lower interest rate than other borrowers for the same tenor, because there is no credit risk or risk of default.

The limitation the scheme does not fix. Access is not the same as liquidity. The workbook is explicit that low liquidity in the secondary retail markets may mean that investors are not able to sell and realise the gains in price, if any. Retail Direct gives an investor a seat at the NDS-OM; it does not guarantee a counterparty.

Where it fits for a retiree. G-secs bought directly give a sovereign-guaranteed, fixed periodic income with no credit risk — which is what the distribution stage wants. Against that, the absence of a cumulative option makes them poor accumulation instruments, and the fully taxable interest has to be compared with a tax-free alternative on a pre-tax equivalent basis. Investors could also transfer G-secs to their normal demat account after buying them.

Mr Vaidya, 59, wants Rs 12,00,000 of government securities for the income stage of his retirement.

Opening the account. He is a resident individual with a rupee savings account, a PAN and completed KYC. He opens an RDG account online with the RBI, at no cost, and adds his wife as a joint holder.

What he buys

All three are above the Rs 10,000 minimum for a G-sec, and none of it passed through a bank's CSGL account.

What he receives. Coupon interest on pre-specified dates, credited directly to his linked savings account. No TDS is deducted — but the interest is fully taxable, so he must provide for the tax himself rather than assuming it has been handled at source.

Interest received in the year          = Rs 79,000 (illustrative)
TDS deducted                           = Nil
Tax payable at his 20 percent bracket  = Rs 15,800, payable by him

That is the practical difference from a bank deposit, where TDS would have taken part of it upfront. A retiree who spends the whole coupon and forgets the tax gets a bill in July.

Where the scheme does not help him. Two years later he wants to sell the SDL early. He logs in to NDS-OM and finds no buyer at a price he will accept. The workbook's warning is exactly this: low liquidity in the secondary retail markets may mean that investors may not be able to sell and realise the gains in price, if any. Retail Direct gave him access to the market, not a guarantee of one.

And what he cannot do at all. He asks whether the interest can be left to accumulate until maturity, like a National Savings Certificate. It cannot: a G-sec has no cumulative option. If he wants the money to compound, he must reinvest each coupon himself.

Chapter 2, section 2.10.2, covers government securities and then introduces the RBI Retail Direct Scheme with its launch date, eligibility, the RDG account, the instruments available and the two trading routes. The G-sec terms in the surrounding paragraphs — the Rs 10,000 minimum, no cumulative option, no TDS but fully taxable, benchmark status and low retail secondary liquidity — are examined together with it.

Expect the launch date (12 November 2021), the account name (Retail Direct Gilt account, opened with the RBI, free of cost), the eligibility trio (rupee savings bank account, PAN, valid KYC), and the instruments accessible (G-secs, Treasury Bills, State Development Loans). Expect also the two ways to transact — non-competitive bids in primary auctions and the NDS-OM secondary market. The tax point, no TDS but fully taxable, is a favourite because it inverts the bank-deposit habit.

• No TDS does not mean no tax. G-sec interest is fully taxable; the tax simply is not deducted at source.
• There is no cumulative option in a G-sec. Interest is paid out on pre-specified dates, so it cannot compound inside the instrument.
• The account is with the RBI, not with a bank or a depository. That is the whole point of the scheme — it bypasses the CSGL and SGL route.
• Free of cost applies to the account. It is not a claim that the securities carry no price risk.
• Access is not liquidity. The workbook warns that retail secondary liquidity is low, so an investor may be unable to sell and realise a price gain.
• A resident individual is the eligible class. The workbook gives no NRI route here, and Chapter 8 separately notes that some products such as the small savings schemes are not available to NRIs.
• G-secs pay less than other borrowers of the same tenor, and that is a feature, not a defect — there is no credit risk or risk of default.
• Treasury Bills and SDLs come with the RDG account too. An answer limiting it to dated G-secs is incomplete.