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Context

• Four states raised Rs 5,800 crore through state development loans (SDL) auction.

Background

• State governments in the country also have their budgets. At times, the expenditure of state governments may be higher than the revenue in the estimated budget. This can lead to a fiscal deficit.
• One of the ways of funding such fiscal deficits is through the issuance of State Development Loans (SDL).

SDL and its Features

• State Development Loan (SDL) is a bond issued by state governments to fund their fiscal deficit.
• Each state can borrow up to a set limit. SDLs pay interest on a half-yearly basis and repay the principal amount on maturity. These bonds are issued generally for 10-year but they can be issued with other maturities too.
• SDLs are less risky than AAA-rated corporate bonds as it has a sovereign guarantee.
• The yield on these papers is usually higher than the benchmark government bonds.
• SDL issues are managed by the Reserve Bank of India. RBI also ensures that the SDLs are serviced by the state governments by closely monitoring interest and principal repayments.
• It is important to note, however, that RBI is not responsible for guaranteeing SDLs. Like any government bond, SDLs can also be electronically traded.
• Apart from retail investors, SDL participants mostly include various banks, insurance companies, mutual funds, provident funds, and other direct institutional investors.

Tax on interest from SDLs

• Interest received from SDLs is taxable just like interest income from any debt instrument.
• Since these generally have a maturity of 10 years, long-term capital gains tax is applicable on the interest income.
• Long-term capital gains tax is applicable at a flat rate of 20% post indexation plus applicable cess and surcharge.

SDL- Fast Facts

• Each state is allowed to issue securities up to a certain limit per year.
• SDLs are traded at a spread above the benchmark G-sec security of the same tenor. The spread is based on the state finances.
• SDLs are issued in the primary market through normal auctions conducted by the RBI and traded in the secondary market.
• Interest is serviced at half-yearly intervals and the principal is repaid on the maturity date.

MUST READ:

 Long-Term Capital Gains Tax - https://www.iasgyan.in/daily-current-affairs/ltcg

Indexation: https://www.iasgyan.in/daily-current-affairs/ltcg

Fiscal Deficit: https://www.iasgyan.in/daily-current-affairs/fiscal-deficit-15#:~:text=Fiscal%20deficit%20is%20the%20negative,of%20taxes%20and%20other%20revenues.

PRACTICE QUESTION Q. Which of the following statements are correct in reference to State Development Loans? a) Long-term capital gains tax is not applicable on the interest income of State Development Loans as they have a sovereign guarantee. b)      SDL issues are managed by the Securities and Exchange Board of India. c)       RBI is not responsible for guaranteeing SDLs. d)      SDLs pay interest on a half-yearly basis and repay the principal amount on maturity. 1.    a and c only 2.    b and d only 3.    c and d only. 4.    All of the above statements are correct. Correct Answer: Option 3

https://www.business-standard.com/economy/news/only-four-states-raise-nearly-rs-5-800-crore-through-bond-auction-123041101045_1.html