Benefits of gilt funds, factors to consider, and taxation

Benefits of gilt funds

If you are a conservative investor who is looking for modest returns, then gilt funds are regarded as a dependable investment option. These funds invest in fixed-interest securities issued by the Central or State Governments. 

The Securities and Exchange Board of India (SEBI) has mandated that gilt funds invest at least 80% of their pooled money in government securities. The remaining 20% can be invested in other bonds. Since these funds invest in securities with a range of maturity times and since the government backs these underlying securities, there is very little risk of repayment default. 

Benefits of gilt funds

  • Gilt funds carry minimal to no credit risk since the government is a trusted issuer. Even though the returns are moderate, you have minimal chances of losing your money.
  • Gilt funds provide a reasonable rate of return on investment. This is typically higher than the majority of other fixed-income investment choices, like bank fixed deposits and recurring deposits.
  • Gilt funds are a great way to gain exposure, knowledge, and experience. Investing in these government-issued bonds allows you to take advantage of the low risk and good returns.

Factors to consider when investing in gilt funds

Maturity period

Long-term gilt funds and short-term gilt funds are two types of gilt funds. Long-term gilt funds invest in long-dated government bonds with maturities ranging from five to 30 years. On the other hand, short-term gilt funds invest in short-term government bonds and long-term bonds with short-term residual maturity. Your investment horizon should be at least three to five years if you are considering investing in gilt funds.


The Reserve Bank of India (RBI) fixes the repo rate, which heavily influences the returns on gilt mutual funds. Gilt funds could provide an estimated return of up to 7% to 9%. Not just that, when the market plunges, gilt funds tend to provide better returns than equity funds.

Risk factor

Due to their lack of credit risk, gilt funds are safe investments. The government will always make an effort to fulfil its obligations. However, they are vulnerable to changes in interest rates. 

Expense ratio

The expense ratio, a recurring annual cost associated with gilt funds, is fixed. The expense ratio covers the fund manager’s fee and any other fees the fund house incurs in running and managing the gilt fund. The expense ratio is charged as a percentage of the Net Asset Value (NAV). According to SEBI regulations, a gilt fund’s expense ratio cannot exceed 2%.

Taxation on gilt funds

By investing in debt securities, gilt funds are subject to the same taxation as other debt mutual funds under the Income Tax Act of 1961. The holding period determines the tax rate:

Short-term capital gains:

Short-Term Capital Gains (STCGs) are defined as capital gains earned in less than three years of possession. For gilt funds, STCGs will be added to your annual income and taxed as per your income tax slab rate. 

Long-term capital gains:

Long-Term Capital Gains (LTCGs) are gains that are levied on capital gains for units held for more than three years. The LTCGs tax rate is 20% with indexation benefits.


When choosing a gilt fund, be sure to weigh your selections in light of your investment objectives, time horizon, and risk tolerance. Gilt funds are an excellent way to add more safety and diversification to an existing mutual fund portfolio, particularly if it is more inclined towards equity.