What are State Development Loans (SDL)?

State governments rely on various sources for revenue. However, most states spend way more than they earn and must borrow money to bridge this gap.

This is where SDLs (State Development Loans) come into the picture. State governments issue SDLs to raise funds from investors to fund welfare schemes and other projects.

State Development Loans are known for their safety and the slightly higher return they offer. But there’s more to them!

In this article, we will explore the world of SDLs, discovering their features, benefits, taxation and all other aspects you should understand as an investor.

Features of State Development Loans

If you are considering State Development Loans (SDLs) for investments, it's crucial to understand their key features. Let's explore these features in detail:

SDLs have a 10-year maturity

Most SDLs have a maturity period of 10 years, although some may have different maturity periods like 6 years and 15 years.

This allows investors to align their investments with long-term financial goals and objectives, providing a stable investment horizon.

SDLs interest rate

SDLs offer investors a fixed rate of return throughout their life. The interest rate is determined through an auction conducted by the RBI (Reserve Bank of India) in the primary market.

As of June 2023, most SDLs offer a yield to maturity of around 7.5%.

For example: “7.36% MADHYA PRADESH SDL 2033” offers a 7.36% YTM as of 5th June, 2023.

SDLs are listed on the exchange

SDLs are listed on stock exchanges and offers convenient buying and selling of SDLs digitally.

SDLs are accessible

SDLs became available to retail investors for investment in 2019. The minimum amount to invest in SDLs directly is Rs. 10,000, making SDLs accessible to a wide range of investors.

Alternatively, investing in SDLs through mutual funds allows for even lower starting amounts, with options available for investments as little as Rs. 500.

SDLs have a fixed repayment schedule

SDLs have a fixed repayment schedule. Investors receive half-yearly interest payments, ensuring a regular flow of income. 

The principal amount is repaid at the end of the maturity period, providing investors with a clear understanding of the repayment structure.

Benefits of Investing in SDLs

Investing in SDLs offers several advantages. We discuss the most significant benefits below:

Low risk

While state governments have routinely struggled to repay their debt obligations, there have been no cases of outright defaults.

Even the RBI Governor Das has confirmed that these instruments have an implicit sovereign guarantee and are absolutely safe for investment.

Stable Returns

SDLs provide investors with stable returns as their coupon rates and interest payment dates are fixed and known before investing.

This makes SDLs a great investment option for investors seeking to generate regular income from their money.

Decent liquidity

Liquidity of an instrument refers to how quickly it can be sold at a fair value.

SDLs have decent liquidity that provides investors with decent flexibility to access their invested capital when needed.

Who Should Invest in SDLs?

SDLs are particularly suitable for investors who seek safe and secure investments with stable returns and tax benefits. They can be an attractive option for the following individuals:

  • Long-term investors:-SDLs are well-suited for individuals looking to make long-term investments aligning with their financial goals and future aspirations.
  • Fixed-Income investors: Investors who prefer fixed-income investments can benefit from the stable returns offered by SDLs, providing a steady income stream to support their financial objectives.
  • Pure equity investors: By adding bonds like SDLs to pure equity portfolios, investors can increase their portfolio’s stability without compromising on returns.

How to Invest in SDLs?

There are two primary methods for investing in SDLs:

Direct investment in SDL

Direct investment in SDLs refers to buying SDLs of your choice through a stock broker. You can create a demat account (if you don’t have one) and invest in SDLs of your choice directly. 

Analysing SDLs requires investment skills that not everyone possesses. So unless you understand SDLs very well or are working with an investment professional, direct SDL investment may backfire.

Through ETFs and mutual funds

Buying SDLs through instruments like ETFs (Exchange Traded Funds) and mutual funds is the indirect way to invest in SDLs.

Investing in SDLs through ETFs/mutual funds should be preferred by investors who don’t have perfect knowledge of the bond markets.

While many debt mutual funds invest in SDLs for a portion of their holdings, certain debt mutual funds also invest only in SDLs.

For example - DSP Nifty SDL Plus G-Sec Jun 2028 30:70 Index Fund helps you invest 30% of your money in SDLs and 70% in G-Secs. On the other hand, Mirae Asset Nifty SDL Jun 2027 Maturity Index Fund invests your money exclusively in SDLs only.

How are SDLs Taxed?

SDLs are not tax free. Interest from SDLs as well as any realized capital gains from sale of SDLs attract taxation as follows:

  • Tax on Interest: The interest income earned on SDLs is considered a part of your total income and taxed as per your income tax slab. It is also subject to 10% TDS that can be claimed for a refund if you are in a lower income tax bracket.
  • Taxation on Short-Term Capital Gains: If you sell an SDL within 1 year of purchase, the capital gains (if any) will be taxed as per your income tax slab.
  • Taxation on Long-Term Capital Gains: If you sell an SDL after 1 year of purchase, the capital gains (if any) will be taxed at a flat rate of 10%.

Note - We have assumed that SDLs are listed.

State Development Loans: Frequently Asked Questions

What is the full form of SDL?

The full form of SDLs is State Development Loans.

Are all SDLs equally safe?

Some states may have a worse financial position than others. Hence, all SDLs are not the same. However, all SDLs have the same implicit sovereign guarantee.

Are SDLs better than G-Secs?

SDLs generally have a higher interest rate than comparable G-Secs. However, this doesn’t make them better than G-Secs. Your investment objective and SDLs and G-Secs available in the market decide what’s better for you.

What are the risks of investing in SDLs?

Although SDLs have a very low credit default risk, they are exposed to other risks associated with reinvestment, interest rate and liquidity.