STRIPS in India: The Complete Guide to Coupon & Principal STRIPS

1What Are STRIPS?

STRIPS stands for Separate Trading of Registered Interest and Principal of Securities. It is how the RBI converts one ordinary, coupon-paying Government Security into a series of individual zero-coupon securities — one for every future coupon payment, plus one for the final principal repayment.

A normal Government Security (G-Sec) is really a bundle of future cash flows: a small coupon every six months, and a large principal repayment at the end. Stripping separates that bundle into its individual pieces. Each piece then trades on its own, with its own maturity date and its own market price.

STRIPS are not a new borrowing instrument. They are created out of the cash flows of an already-issued, eligible Government Security — the government does not auction "STRIPS" directly the way it auctions a conventional G-Sec or T-Bill.

2STRIPS in 60 Seconds

3How Stripping Works

A conventional G-Sec pays a fixed coupon at regular intervals (usually semi-annually) and returns the principal at maturity. Every one of those future payments is a separate, dated cash flow.

Stripping cuts that stream into pieces. Whoever holds an eligible security submits a request through the RBI's government-securities framework. The security is then converted: every remaining coupon becomes its own Coupon STRIP, and the final principal repayment becomes the Principal STRIP.

Each resulting STRIP is registered as an individual Government security, and can be transferred, held, or sold on its own. Unlike a T-Bill or a regular G-Sec, STRIPS are not issued through a scheduled RBI auction — they exist only because someone chose to strip an eligible bond they already held. The total stock of STRIPS in the market depends on how much stripping investors have actually done, not on a government borrowing calendar.

4Types of STRIPS: Coupon STRIPS and the Principal STRIP

RBI's framework recognises two categories of STRIP — Coupon STRIPS and the Principal STRIP. These are not competing products; they are the two categories of security that one stripping operation produces from a single underlying bond.

5Worked Example: Turning One Bond Into 11 STRIPS

Hypothetical Government Security: ₹100 face value, 8% annual coupon paid semi-annually (₹4 every six months), 5 years to maturity. The actual coupon, tenure, and price of any real security will differ.

Stripping this one bond produces 10 Coupon STRIPS (₹4 each) plus one Principal STRIP (₹100) — 11 individual zero-coupon securities from a single bond.

6Coupon STRIP vs Principal STRIP — Side by Side

7Why Coupon STRIPS Mature on Different Dates

Each Coupon STRIP inherits the maturity date of the specific coupon it represents. So the STRIPS created from one bond mature on several different future dates, not just one — letting an investor choose exposure to a specific date rather than holding the whole bond to final redemption.

• Illustrative timeline (hypothetical years):
• 2027 (H1) → Coupon STRIP
• 2027 (H2) → Coupon STRIP
• 2028 (H1) → Coupon STRIP
• 2028 (H2) → Coupon STRIP
• ...
• 2031 (H2) → Coupon STRIP + Principal STRIP (final maturity)

8Each STRIP Is a Separate Security — ISIN and Fungibility

Every individual STRIP is registered as its own Government security with its own ISIN, separate from the original bond and from the other STRIPS created alongside it.

"STRIP type" (Coupon STRIP or Principal STRIP) describes the category of cash flow; "individual STRIP" describes one specific security with a specific maturity date; ISIN is the identifier used to track and settle it.

Coupon STRIPS that share an identical maturity date can, under RBI rules, be treated as interchangeable and share a common ISIN, regardless of which underlying bond the coupon came from — a ₹4 coupon due on a given date is the same cash flow no matter which bond it came from. Principal STRIPS are treated distinctly and do not share this fungibility.

9Reconstitution — Putting the Bond Back Together

Reconstitution is the reverse of stripping. Someone who has assembled the complete, matching set of Coupon STRIPS and the Principal STRIP belonging to one original security can request RBI to reconstitute them into the original coupon-bearing bond.

This needs the specific matching STRIPS — not any random collection. Stripping and reconstitution let market participants hold the cash-flow structure that suits them at a given time, without the government issuing or redeeming anything new.

10Zero-Coupon Nature of a STRIP

Every individual STRIP — Coupon STRIP or Principal STRIP — has exactly one future cash flow and pays no periodic interest. That makes each one a zero-coupon security.

The reverse is not true: a security can be issued as zero-coupon from day one without ever being stripped from a coupon-bearing bond. A STRIP is zero-coupon in nature, but not every zero-coupon bond is a STRIP.

11How STRIPS Generate a Return

A STRIP pays nothing until its single maturity date, so it is bought at a discount to that future payment. The gap between purchase price and maturity payment is the gross return. These figures are illustrative — actual prices depend on prevailing yield, time to maturity, and market conditions.

This gross gain is not an annual return. Converting it into a comparable annual yield needs the time to maturity and compounding convention, not just the raw discount.

12Yield and Discount Pricing

A STRIP's price reflects its single future payment discounted at the yield the market currently demands for that maturity. Even though every Coupon STRIP from one bond has the same origin, they usually do not share one price or yield.

Each Coupon STRIP has a different maturity date, and the market's required yield for money due in 1 year is not the same as for money due in 4 years. Liquidity for a specific maturity date can also differ. STRIPS from the same bond typically do not trade at identical yields.

13STRIPS and the Yield Curve

Because each STRIP is a single, isolated cash flow with a known maturity date, a set of STRIPS at different maturities can be used to build a zero-coupon yield curve — the yield the market demands purely for time, without the reinvestment assumptions a coupon bond introduces. This matters mainly to institutional bond-market participants; for an individual holding, a STRIP is simply one instrument with one future payment and one price today.

14Maturity Matching

Because different STRIPS mature on different known dates, an investor with a specific future cash need can look for a STRIP whose maturity date lines up with that need, instead of holding a coupon bond and reinvesting interim coupons.

A STRIP with exactly the desired maturity and size may not exist, and matching the nominal amount does not protect its purchasing power against inflation.

15Risks of Investing in STRIPS

STRIPS are created from sovereign Government Securities, but that does not make them risk-free.

• Interest-rate risk
• No interim coupon to reinvest
• Liquidity risk
• Inflation risk
• Market-price risk before maturity

16Selling Before Maturity vs Holding to Maturity

Hold a STRIP to maturity and you get the single payment it represents. Sell before maturity and you get whatever the secondary market pays at that time, which depends on prevailing yields and liquidity — higher or lower than what you paid.

The certainty of a STRIP's stated payment applies specifically to holding it through to maturity, not to an early sale.

17Eligible Underlying Securities

Not every Government Security can be stripped. RBI's framework applies to a notified category of eligible fixed-rate, non-callable Central Government securities — not securities with special features such as Floating Rate Bonds or capital-indexed bonds.

The framework originally covered Central Government securities. RBI later extended stripping and reconstitution to eligible State Government Securities (State Development Loans) as well.

18Face Value, Denomination, and Deal Sizes

Individual Coupon STRIPS and the Principal STRIP each carry a face value tied to the cash flow they represent — for example, a ₹4 coupon STRIP or a ₹100 principal STRIP in the hypothetical example above.

The minimum tradable size for STRIPS has historically been set at levels aimed at institutional participants, and can differ from the ₹10,000 retail minimum used for T-Bills and regular G-Secs. Confirm the current minimum with your bank or broker before transacting.

19How Retail Investors Can Access STRIPS

STRIPS have mostly traded among banks, primary dealers, insurance companies, and mutual funds — not as a walk-up retail product.

RBI Retail Direct, the platform used for T-Bills, regular G-Secs, State Development Loans, and Sovereign Gold Bonds, does not currently list STRIPS for direct purchase.

A retail investor can check with a full-service broker or bank offering bond-desk access, or look at debt mutual funds that may hold STRIPS as part of a portfolio, giving indirect exposure. Confirm current access with the platform or intermediary before assuming any of these routes work.

20Taxation of STRIPS

STRIPS are zero-coupon Government securities. Zero-coupon debt can be taxed one of two ways depending on classification: as a capital gain when sold or redeemed, or as accrued interest income taxed each year as it builds up.

Check the current rate and method that applies to your holding with a tax advisor before relying on it.

21Costs of Transacting in STRIPS

Costs depend on the route used. Institutional trades carry standard settlement and dealing costs. A retail investor going through a broker or bank bond desk should ask about brokerage, platform charges, and any fee for a stripping or reconstitution request.

22STRIPS vs Government Bonds (G-Secs)

23STRIPS vs Other Zero-Coupon Bonds

24STRIPS vs Treasury Bills

25STRIPS vs Fixed Deposits

26Who Might Find STRIPS Useful

• Investors with a known future cash requirement on a specific date
• Investors wanting zero-coupon Government-security exposure without coupon reinvestment
• Investors comfortable evaluating secondary-market pricing and yield

27Common Mistakes to Avoid

• Thinking a Coupon STRIP pays periodic coupons
• Assuming there is only one Coupon STRIP per underlying bond
• Confusing a Coupon STRIP with the Principal STRIP
• Confusing STRIPS with every other zero-coupon bond
• Confusing face value with market price
• Confusing coupon with yield
• Assuming all STRIPS from one bond share the same maturity date
• Assuming all STRIPS from one bond trade at identical yields
• Assuming a government security can never fall in market price before maturity
• Ignoring liquidity
• Ignoring inflation
• Assuming every broker or platform offers direct STRIPS access
• Ignoring tax treatment
• Treating stripping and reconstitution as the same process