Bored of FDs? Municipal Bonds Offer 8–8.5% Returns as a New Investment Avenue

New Delhi: Investors looking beyond fixed deposits, stocks, gold, silver, or real estate can now consider municipal bonds as a lucrative option. The recently announced Union Budget has given fresh momentum to India’s emerging municipal bond market, making it an attractive avenue for stable returns.

A New Investment Option

The budget proposes incentives for cities raising over ₹1,000 crore through municipal bonds, offering a ₹100 crore reward. Smaller bonds, up to ₹200 crore, will continue to receive support under the AMRUT (Atal Mission for Rejuvenation and Urban Transformation) program. The move aims to encourage large urban local bodies to raise funds from capital markets rather than relying heavily on government grants or bank loans, while also keeping smaller municipalities engaged in the market.

What Are Municipal Bonds?

According to the Economic Times, municipal bonds are debt instruments issued by city governments to fund infrastructure projects such as roads, water supply, sanitation, and urban development. Investors receive a steady return backed by the city’s revenue.

Rising Appeal

The yields on municipal bonds are comparable to those of large corporate bonds and slightly higher than state development loans (SDLs). Experts note that AAA-rated municipal bonds currently offer 0.75% to 1% higher returns than government or corporate bonds of similar quality. With yields in the 8–8.5% range, demand is strong, and these bonds are often fully subscribed quickly—offering higher returns than conventional FDs.

Challenges Remain

Most municipal bonds are issued via private placement, meaning retail investors often cannot participate. Another challenge is liquidity: bonds are generally small in size and hard to resell immediately. In 2025, total municipal bond trading stood at only ₹175 crore, as investors prefer to hold them until maturity.

A Changing Scenario

The budget’s ₹100 crore incentive could transform the landscape, boosting both issuance and trading of municipal bonds. Experts highlight that these bonds carry relatively low risk, making them a promising alternative for investors seeking steady, above-FD returns.