What are the Tax Implications of Investing in NBFC Bonds?

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When you invest in NBFC bonds, you can earn income in two ways:

• Through “interest income”, which is calculated at a predetermined interest rate

and

• Through “capital gains”, which arise if you sell the bond at a price higher than its purchase cost. 

Both forms of income are taxable under the Income Tax Act, 1961, though the tax treatment differs for each. Want to learn about them? In this article, let’s check out the latest NBFC bond tax implications as per the latest amendments introduced under the Union Budget 2025.

What is the Tax Treatment of NBFC Bond Income?

Interest earned from NBFC bonds is 100% taxable under the head “Income from Other Sources” in the year it accrues or is received. Such an interest income is added to your income for the financial year under the head “Income from Other Sources”. 

Consequently, it gets taxed at your applicable income-tax slab rate (5%, 10%, 20%, 30% plus surcharge and cess). Be aware that there is no concessional or special tax rate for NBFC bond interest.

Now, if we specifically talk about the “tax treatment” of interest income from NBFC bonds, it depends on whether:

• The bond pays interest periodically (monthly, quarterly, or annually) 

or

• Accumulates interest and pays it only at maturity

In both cases, the primary difference lies in the “timing of taxation”. When interest is paid periodically, the actual interest received during a financial year is added to your total income and taxed accordingly. In contrast, if you opt for a cumulative NBFC bond where interest is paid only at maturity, the interest must be “accrued annually” and included in your total income every year (even though the amount is not actually received). 

Let’s understand it better, through two examples:

Example 1: Periodic Interest Payout (Monthly/ Quarterly/ Annual)

Since you have chosen the quarterly interest payout option, the entire interest of ₹50,000 is actually received during the financial year. It must be added to your income for the financial year under the head “Income from Other Sources”. As a result, it becomes a part of your total income and gets taxed at your applicable slab rates.

Example 2: Cumulative or Interest-at-Maturity

Since you have opted for the cumulative investment option, no interest is actually credited to your bank account during the tenure of the bond. However, for income-tax purposes:

• The interest income of ₹50,000 continues to accrue each year 

and

• Must be included annually in your taxable income under the head “Income from Other Sources” (even though it is received only at maturity).

Okay, so what will be the tax treatment on maturity? At maturity, you are not required to add the entire maturity amount to your total income. Instead, you only need to include the interest income that accrues for the maturity year.

Reason? By accruing interest annually + including it in your total income, you have already paid tax on the interest for all previous years. Now, taxing the full maturity amount again would result in “double taxation”. Therefore, only the interest related to the final year is taxable in the year of maturity.

What is the Latest Capital Gains Tax on NBFC Bonds?

Besides earning interest income, you can also benefit from “capital gains” by selling your NBFC bonds before maturity in the secondary market. Now, the tax rate applicable to these gains depends on the “holding period”, which is how long you held the bond before selling or redeeming.

Based on this holding period, capital gains are classified into two categories:

 

1. Short-Term Capital Gains (STCG)

and

1. Long-Term Capital Gains (LTCG)

It is important to note that the rules for determining STCG and LTCG differ depending on whether the NBFC bond is “listed” or “unlisted”. Let’s see how this classification is made and how each type of gain is taxed:

Note: Tax rules are subject to change. Investors must do their own research before investing.

Now, to better understand the capital gains tax on NBFC bonds, let’s study some hypothetical examples.

Example 1: Listed NBFC Bond

Since the bond is listed and held for more than 12 months, the gain qualifies as Long-Term Capital Gain (LTCG). The tax rate of 12.5% (without indexation) will be applicable. The final tax liability would be ₹1,875 (₹15,000 x 12.5%) + applicable cess.

Example 2: Unlisted NBFC Bond

Although the unlisted bond is held for a long period (more than 12 months), the gains arising from it will be treated as Short-Term Capital Gain (STCG). The entire STCG of ₹20,000 will be:

• Added to the total income of the investor

and

• Taxed as per the investor’s applicable income-tax slab.

To Sum Up, NBFC Bond Tax Implications Arise in the Form of Taxable Interest Income + Capital Gains Made On Exit

Till now, you must have understood that by investing in NBFC bonds, you can earn income in two ways, which are regular interest income during the holding period and capital gains if you sell the bonds before maturity at a higher price. 

Both these income streams are taxable under the Income Tax Act, 1961, as follows:

• Interest earned from NBFC bonds is taxed at your applicable income-tax slab rate. 

and

• Capital gains are taxed as LTCG or STCG (depending on the holding period)

If you are looking to invest in NBFC bonds and are exploring suitable options, you may visit the GoldenPi platform. Here, you can find high-yield bonds, AAA-rated bonds, short-term bonds, and more. Also, the entire investment process is 100% digital and can be completed online without any branch visits.

NBFC Bond Tax Implications FAQs

Are there any tax benefits of investing in NBFC bonds?

Unlike tax-saving fixed deposits, most NBFC bonds do not provide direct tax deductions under Section 80C. However, if you invest in “tax-free bonds”, the interest earned is exempt from income tax. These bonds are usually issued by government-backed entities such as NHAI, IRFC, and other public sector agencies.

How much TDS is deducted on interest income from NBFC bonds?

As per Section 193 of the Income Tax Act, TDS on interest income is deducted by the issuing NBFC when interest exceeds ₹10,000 in a financial year for regular customers and ₹50,000 for senior citizens. The standard TDS rate is 10% if a valid PAN is provided. If the investor fails to furnish a PAN, TDS is deducted at a higher rate of 20%.

Can I skip accrual of interest income and pay tax once in the year of maturity?

No! For cumulative NBFC bonds, interest is taxed every year on an accrual basis, even if it is paid only at maturity. This ensures you are not deferring tax for multiple years. Paying tax only in the year of maturity is not allowed and would violate the current income-tax rules.

Can I index my purchase cost while calculating capital gains?

No! Currently, indexation benefit is not allowed for NBFC bonds, whether listed or unlisted. Thus, while calculating capital gains, you cannot adjust the purchase price for inflation.

Disclaimer:

This information is for general information purposes only. GoldenPi makes no guarantee on the accuracy of the data provided here; the information displayed is subject to change and is provided on an as-is basis. Nothing contained herein is intended to or shall be deemed to be investment advice, implied or otherwise. Investments in the debt securities/ municipal debt securities/ securitised debt instruments are subject to risks, including delay and/ or default in payment. Read all the offer-related documents carefully.

Bonds or non-convertible debentures (NCDs) are regulated by the Securities and Exchange Board of India and other government authorities. GoldenPi Securities Private Limited is a registered debt broker and acts as a distributor and not as a manufacturer of the product.