Surety Bonds by State in India: Which States Accept Them and What Contractors Need to Know
Updated: 2 days ago
TL;DR
State rules differ. The central mandate doesn’t automatically apply to states, so check each tender.
Where they’re accepted: state PWDs in Maharashtra, Karnataka, Gujarat, Tamil Nadu, Uttar Pradesh and Rajasthan, plus major metro and municipal bodies. 69 state bodies are on record in total.
How to check: see if the tender’s bid security clause lists insurance surety bonds next to bank guarantees. If it doesn’t, ask for a corrigendum citing the state’s policy.
Why switch: bank guarantees use up your bank limits and need cash margin. Insurance surety bonds use neither.
When the Department of Financial Services issued its September 2024 directive making insurance surety bonds mandatory for all central government procurement, many contractors assumed this settled the question for their state PWD tenders too. It did not.
The DFS directive covers central government departments, ministries, and central PSUs. State governments operate under entirely separate procurement frameworks. The General Financial Rules that underpin the central mandate do not automatically extend to state-level procurement.
The result is a patchwork across India. Some states have incorporated surety bonds into their standard tender conditions. Others have not. A contractor bidding on state tenders today faces a verification step that does not exist for central government or NHAI contracts.
This guide explains the regulatory split, maps surety bonds by state across India's major PWDs, and gives contractors the practical steps to confirm acceptance and submit correctly.
Why State Government Tenders Work Differently
The central government's surety bond framework rests on two pillars. GFR Rule 170 (amended 2022) recognised insurance surety bonds as valid bid security instruments across central government procurement. GFR Rule 171 did the same for performance security. The DFS directive of September 2024 converted permissive acceptance into a mandatory requirement. A central department that refuses a valid ISB submitted by a contractor is no longer exercising discretion.
State governments are not bound by GFR. Each state operates under its own State Financial Rules, state PWD manuals, and procurement codes. For a state to mandate ISB acceptance, it must do one of the following:
Issue its own equivalent of the DFS directive
Amend its state financial rules to include ISBs as approved instruments
Include ISBs explicitly in individual tender documents on a case-by-case basis
As of October 2026, no state has issued a blanket mandate equivalent to the central DFS directive. What has happened is more gradual. A number of states have updated their standard tender conditions to include ISBs alongside bank guarantees, so most tenders from those PWDs now list surety bonds as an accepted instrument.
But the acceptance is per-tender, not a universal legal mandate. Field-level procurement officers retain discretion. A contractor still needs to verify the specific tender document before submitting a state surety bond.
Surety Bond Requirements by State: The Full Acceptance Map (October 2026)
The following state PWDs have surety bond acceptance in place. The “per-tender” note means you must confirm the specific tender document lists ISBs before relying on one.
State PWDs:
Maharashtra PWD: accepted, per-tender verification required
Karnataka PWD: accepted, per-tender verification required
Gujarat Roads and Buildings Department: accepted, per-tender verification required
Tamil Nadu Highways: accepted, per-tender verification required
Uttar Pradesh PWD: accepted, per-tender verification required
Rajasthan PWD: accepted, per-tender verification required
Metro corporations (state-backed, separately managed):
DMRC (Delhi Metro Rail Corporation): accepted
MMRC (Mumbai Metro Rail Corporation): accepted
BMRCL (Bangalore Metro Rail Corporation): accepted
CMRL (Chennai Metro Rail): accepted
KMRL (Kochi Metro Rail): accepted
ISBs are accepted across civil EPC, rolling stock, depot construction, and station fit-out contracts at all metro corporations listed above.
Major municipal corporations:
BMC (Brihanmumbai Municipal Corporation): accepted
MCD (Municipal Corporation of Delhi): accepted
GHMC (Greater Hyderabad Municipal Corporation): accepted
BBMP (Bruhat Bengaluru Mahanagara Palike): accepted
ISBs are accepted for road, drainage, water supply, and solid waste contracts at these bodies. Smaller municipal corporations vary. Always check the specific tender.
In total, 69 state government bodies have a public tender or notice on record accepting an insurance surety bond, alongside 158 central bodies. Four states account for 57% of the state bodies: Maharashtra and Andhra Pradesh (11 each), Rajasthan (9) and Karnataka (8). Odisha (4), Chhattisgarh (2), Bihar (1) and Uttarakhand (1) also have bodies on record.
States with no public tender on record accepting an insurance surety bond (as of October 2026): Kerala, Jharkhand, Himachal Pradesh, Goa, Sikkim, Arunachal Pradesh, Nagaland, Mizoram, and Tripura. Having none on record does not mean a state has refused them. It means no public tender showing acceptance was found when the list was compiled. Contractors working in these states should check individual tender documents and contact the insurer before bidding.
What "Per-Tender Acceptance" Means for All State Surety Bonds
Acceptance at state level is different from acceptance at NHAI or CPWD. At NHAI, Policy Circular 3.1.41/2025 makes surety bonds the default instrument. No verification needed. At state PWD, acceptance is embedded in the tender document itself.
What this means in practice:
The Bid Data Sheet or Instructions to Bidders section lists accepted forms of bid security. If "insurance surety bond issued by an IRDAI-licensed insurer" appears alongside bank guarantee, the tender accepts ISBs.
If only bank guarantee is listed, the contractor can submit a pre-bid clarification request citing the state PWD's general policy and requesting a corrigendum. In states where the PWD has accepted ISBs in principle, this approach has worked.
If the tender is from a state with no public tender on record accepting ISBs, raise the clarification request and be prepared to fall back to a bank guarantee if denied.
The format requirement matters as much as the acceptance decision. Each obligee has its own prescribed bond wording. NHAI and CPWD have pre-approved formats. State PWDs may have their own format or may accept the CPWD standard. A bond issued in the wrong format will be rejected regardless of the state's general policy. Always confirm the required format with the insurer before issuance.
How to Verify Surety Bond Requirements by State Before Bidding
Step 1: Check the tender document. Download it and go to the bid security clause. Look for "insurance surety bond" or "surety bond issued by an IRDAI-licensed insurer" under accepted instruments. If it is listed, you can proceed.
Step 2: If ISBs are not listed, check whether the state PWD has issued a general acceptance circular. For the six states in the acceptance map above, the policy exists. Submit a pre-bid clarification request in writing, citing the state PWD's policy and requesting the tender document be updated via corrigendum.
Step 3: Contact your ISB provider with the tender document before doing anything else. They will confirm current field-level acceptance for that specific obligee and issue the bond in the correct format for that state PWD. A bond issued in the wrong format will be rejected regardless of the state's general policy.
Bond Types Required in State Tenders
State government tenders typically require the same types of insurance surety bonds as central government contracts, at similar stages of the contract lifecycle:
Bid security bond (EMD replacement): required at tender submission, typically 1-2% of estimated contract value
Performance security bond: required after contract award and before work begins, typically 5-10% of contract value
Advance payment bond: required when the contractor takes a mobilisation advance, typically 1-2.5% of the advance amount
Retention money bond: required to release retention held by the obligee during or after execution, typically 0.8-2%
Defect liability bond: required post-completion during the maintenance period, typically 1-2.5%
What this means for a typical state contract: on a Rs 10 crore state PWD contract with 5% performance security, the contractor needs a Rs 50 lakh bank guarantee. That uses Rs 50 lakh of bank limit and typically needs a 10% cash margin, about Rs 5 lakh. A surety bond avoids both. The insurance surety bond premium at 1-1.5% of the bond amount is about Rs 50,000 to Rs 75,000. No margin money. No collateral. No NFB limit consumed.
The MSME Opportunity Across All State Surety Bonds
State government tenders form the bulk of India's infrastructure construction by number of contracts. Roads, bridges, drainage, buildings, and water supply are primarily executed through state PWDs, municipal bodies, and urban development authorities. Most MSME contractors work primarily on state tenders, not NHAI or central PSU contracts.
The bank guarantee problem is more acute at the state level for three reasons.
First, state contracts are often smaller, Rs 1 to 25 crore, and many banks set minimum NFB thresholds that smaller contractors cannot qualify for.
Second, state tendering cycles are fast. A contractor bidding on multiple state PWD tenders in the same quarter can exhaust NFB limits quickly.
Third, state-level procurement officers are often unfamiliar with ISBs, which creates rejection risk even where acceptance is in principle permitted.
The numbers:
Insurance-backed surety bonds could release Rs 1.13 trillion in liquidity for MSMEs by replacing eligible bank guarantees across India.
An MSME contractor running three concurrent state contracts of Rs 10 crore each, with 5% performance security, has Rs 1.5 crore of bank guarantees outstanding. That uses Rs 1.5 crore of bank limits and, at a 10% cash margin, locks about Rs 15 lakh in cash.
Switching to ISBs frees both: the full Rs 1.5 crore of bank limits and the Rs 15 lakh of margin money.
The premium for three performance bonds is about Rs 1.5 to 2.25 lakh in total, 1-1.5% of the Rs 1.5 crore bond amount.
GFR Rule 170 exempts MSME contractors from bid security on central government tenders. Several states are adopting similar MSME exemptions, though not yet uniform across all six states above.
For more on how ISBs help MSMEs scale bidding capacity, see the axiTrust whitepaper on MSMEs and surety bonds.
Challenges That Still Limit State-Level Adoption
Three structural problems slow down the expansion of surety bonds by state across India.
The IBC disparity: Under the Insolvency and Bankruptcy Code, banks have recovery rights that insurers do not. Banks invoke bank guarantees on demand. Insurers writing surety bonds have no equivalent recourse when a contractor enters insolvency. This makes insurance surety bond underwriting for state-level contractors more conservative.
In April 2026, RBI and IRDAI jointly acknowledged that ISBs are not yet captured by credit information companies, creating a blind spot in contractor leverage assessments.
Field-level inconsistency: Even where a state PWD has accepted ISBs in its standard tender conditions, a district-level procurement officer may not apply the policy consistently. A bond can be returned at a field office even though the state head office policy permits it. This is improving as more state-level officers gain familiarity with the instrument, but it remains a risk.
Absence of standard state-level bond formats: NHAI and CPWD have published pre-approved formats. Most state PWDs have not. A contractor submitting a bond in the wrong format faces rejection regardless of the state's acceptance policy. Working with an ISB provider who maintains current, obligee-specific formats for each state PWD is the most reliable way to avoid this.
What Is Coming: State Adoption Is Accelerating
Ministry of Power directive, April 2026: The Ministry of Power opened the power sector to ISBs and advised all states, union territories, and procuring utilities to include ISBs in bidding documents for power procurement, renewable energy, pumped storage, and transmission. This is advisory only, not mandatory for states, but it represents a clear signal from the centre. Source: Indian Infrastructure, July 2026
IRDAI task force (August 2024 onwards): A task force was formed comprising insurers, banks, and reinsurers under the General Insurance Council. The mandate includes addressing the bank-insurer collaboration gap, improving data sharing, and expanding surety bond scope including state-level format standardisation.
Electronic ISBs: National E-Governance Services Limited (NeSL) introduced an electronic ISB (e-ISB) solution in September 2026 as a digital alternative to physical bond instruments. No issuance data has been published yet. If adopted at scale, e-ISBs would make surety bond requirements by state easier to enforce by removing physical document handling as a source of inconsistency.
Where the market stands:
By July 2025, 12 insurers had issued bonds worth Rs 10,369 crore for NHAI contracts alone, covering 1,600 bid security bonds and 207 performance bonds.
Over 3,300 surety bonds, worth more than Rs 29,000 crore, had been issued across India, per industry estimates reported by Indian Infrastructure on 3 July 2026.
The market is projected to reach Rs 1 trillion by 2029-30.
State-level procurement is identified as the next major growth frontier for all state surety bonds in India.
About axiTrust
axiTrust is India's surety bond platform for insurers, contractors, and enterprises. The platform handles surety bond underwriting, issuance, and lifecycle management for IRDAI-licensed insurers across India.
For contractors checking surety bond requirements by state and bidding on state government tenders, axiTrust provides:
State-specific bond formats pre-matched to each state PWD's required wording
Eligibility assessment and underwriting support across all IRDAI-licensed surety insurers
Pre-bid confirmation of ISB acceptance status for specific state tenders
End-to-end management from application to bond delivery
If you are bidding on a state PWD, municipal corporation, or metro rail tender and want to confirm whether a surety bond will be accepted and at what premium, contact axiTrust before the bid deadline.
