PSU Bonds vs Corporate Bonds: What's the Real Difference?
Both PSU bonds and corporate bonds (NCDs) sit between government securities and equity on the risk spectrum. But they are meaningfully different instruments. PSU bonds carry an implicit government backing; corporate NCDs depend entirely on the issuer's financial health. This article explains the structural differences, yield dynamics, liquidity, and how to decide between them.
What is a PSU bond?
PSU (Public Sector Undertaking) bonds are debt instruments issued by government-owned companies. The issuer is a company in which the Government of India (or a state government) holds a majority stake — entities like NTPC, IRFC, REC, PFC, NABARD, NHAI, HUDCO, Power Grid, and ONGC.
These companies are commercially run, but the government connection is real: there is a widespread market presumption (though not a legal guarantee) that the Government would not let a major PSU default on its debt. This "implicit sovereign support" is reflected in their credit ratings — most major PSUs are rated AAA by CRISIL and ICRA.
What is a corporate bond (NCD)?
A corporate NCD (Non-Convertible Debenture) is issued by a private or non-government company. It has no implicit government support. The investor bears the full credit risk of the issuing entity. If the company's financial position deteriorates, so does the bond's credit quality.
NCDs are listed on BSE or NSE. They can be secured (backed by specific assets) or unsecured. Secured NCDs offer a higher claim on assets in default, but this protection is only as good as the asset value and the legal enforcement process — both of which can be uncertain in practice.
Yield comparison
As of mid-2026, approximate yield ranges for AAA-rated instruments across tenors:
| Instrument | 3-year yield | 5-year yield | 10-year yield |
|---|---|---|---|
| G-Sec (Central Govt) | 6.9–7.1% | 7.0–7.2% | 7.1–7.4% |
| SDL (State Govt) | 7.2–7.5% | 7.3–7.6% | 7.4–7.8% |
| PSU bond (AAA) | 7.3–7.6% | 7.4–7.7% | 7.5–7.9% |
| Corporate NCD (AAA) | 7.5–8.0% | 7.7–8.3% | 7.8–8.4% |
| Corporate NCD (AA) | 8.0–9.0% | 8.2–9.5% | 8.5–10.0% |
| Corporate NCD (A) | 9.5–11% | 10–12% | 11–13%+ |
The spread of a PSU bond over a G-Sec is typically 20–60 basis points (0.20–0.60%). A corporate AAA NCD might yield 60–100 basis points more than a G-Sec. The spread widens sharply as you go down the rating scale.
The implicit government guarantee question
PSU bonds do not carry an explicit government guarantee unless specifically stated in the offer document. The "implicit support" thesis rests on history (no major PSU has defaulted in India) and the assumption that the government's reputational and systemic stakes would prevent it from allowing a major PSU default.
However, this assumption is not legally codified. In 2019, the IL&FS crisis showed that non-bank financials with government connections can still face severe distress. IL&FS was not a PSU in the traditional sense, but the episode reinforced that "government-adjacent" is not the same as "government-backed."
For mainstream AAA PSUs (IRFC, REC, PFC, NTPC, Power Grid), the market's comfort with implicit support appears justified by their business model (lending to or operating government infrastructure). For smaller or more commercially exposed PSUs, the assumption deserves more scrutiny.
Liquidity differences
PSU bond liquidity varies significantly. Large benchmark PSU bonds (PFC, IRFC, NTPC in standard maturities) have reasonable secondary market liquidity on BSE's BSECD segment — institutional investors trade them actively. Smaller PSU bonds or off-benchmark maturities can be illiquid.
Corporate NCDs in general have lower secondary market liquidity. AAA-rated large issuers (HDFC, Tata Capital, LIC Housing) have better liquidity than smaller or lower-rated issuers. For retail investors trying to exit before maturity, the bid-ask spread can be wide, particularly for bonds held in small lot sizes.
If liquidity matters to you — and it should if your investment horizon might shorten — PSU bonds from marquee issuers are generally a better choice than corporate NCDs at similar ratings.
Tax treatment
PSU bonds and corporate NCDs are taxed identically for most purposes: coupon income at slab rate, LTCG at 12.5% after 12 months (listed). The exception is tax-free bonds — these were issued by specific PSUs (NHAI, IRFC, REC, HUDCO, PFC) in 2012–2016 under special government approval. Their coupons are exempt from income tax. These bonds continue to trade in the secondary market and carry a yield discount relative to taxable bonds that effectively reflects the tax benefit for high-bracket investors.
Regulatory context
PSU bonds are subject to SEBI's debt securities regulations and RBI guidelines (where applicable for banking-sector PSUs like bank bonds). Corporate NCDs follow SEBI's LODR and NCS regulations. The regulatory oversight is comparable in principle. In practice, the government's indirect role in PSU oversight adds a layer of institutional attention.
How to decide
A few factors to consider:
- How much extra yield justifies the extra risk? If a corporate AAA NCD yields 50 bps more than a PSU AAA bond, ask yourself whether that increment justifies the removal of implicit sovereign support. For most conservative investors, it may not.
- Are you comfortable with the specific issuer's financials? For AA or lower-rated NCDs, read the issuer's financial statements before buying. The screener's rating alone is not enough.
- How long is your investment horizon? Shorter horizons increase the importance of liquidity — lean toward PSU bonds or benchmark NCDs where exit markets exist.
- Do you need tax-free income? If you are in the 30% bracket, a tax-free PSU bond at 7.0–7.5% may net more than a taxable corporate NCD at 8.5–9.0%.