Invest in government bonds
Government securities are issued by the Government of India, and state development loans by state governments. Both carry sovereign backing, which makes them the lowest-credit-risk fixed income available to an Indian investor, and both are held in your own demat account.
G-Secs and SDLs: what the difference is
A government security (G-Sec) is a debt instrument issued by the Government of India, carrying a sovereign guarantee on both interest and principal. A state development loan (SDL) is the state government equivalent, issued by individual states to fund their own spending.
SDLs typically offer a slightly higher yield than central G-Secs of the same tenor. That spread reflects lower liquidity and the market's assessment of state finances, not a difference in sovereign guarantee.
Credit risk is not the risk that matters here
Because these are sovereign obligations, the risk of not being repaid is as low as it gets in rupee fixed income. The risk that does matter is interest-rate risk: if market rates rise after you buy, the price of your bond falls, and selling before maturity would crystallise that loss.
That effect is larger the longer the remaining tenor. A 30-year G-Sec moves far more for the same change in rates than a 3-year one. Holding to maturity removes the price risk entirely — you receive the coupons and the face value as scheduled regardless of what rates did in between.
How government bonds are taxed
Interest on G-Secs and SDLs is taxable at your slab rate as income from other sources. Gains from selling on the exchange before maturity are capital gains, long-term if held more than 12 months.
This is general information rather than tax advice, and the rules change. Check your own position with a qualified adviser.