The Indian investment market has considered bonds a relatively safer option. Corporate bonds, with higher interest rates than other categories, are more attractive to investors. Obtaining the maximum yields possible from an investment at the lowest possible risk is a prime driving force for investors. That said, other crucial matters also require consideration, and the tax implications are among them!
The Income Tax Act of India, 1961, has detailed provisions and guidelines on how different incomes are to be termed, how the tax liabilities of different individuals and entities are to be determined, and the percentage of tax to be imposed. Corporate bonds are no exception. In fact, the bonds have also been categorised based on taxation.
Key Takeaways
- The interest income in corporate bonds is taxable, depending on the tax slab rates of an individual.
- The listed and unlisted bonds have different tax applicability for capital applications depending on the holding period, which is short-term capital gain tax and long-term capital gain tax.
- Zero coupon bonds by default offer no interest, therefore no tax on interest, whereas capital gains are taxed as regular bonds are.
- The interest in tax-free bonds is free of tax but the capital gains are subject to STCG and LTCG based on the holding period.
- TDS of 10% is applicable to the interest income if it exceeds INR 5,000 in the financial year unless Form 15G or Form 15H is submitted.
- Corporate bonds, unlike government bonds, don’t offer tax-free or tax-saving advantages; hence, capital gains are taxed accordingly.
Categorising Bonds Based on Taxation: Where Do Corporate Bonds Fall?
Public and private sector companies, state and central governments, municipalities, and other entities in the country list bonds for the public to invest in. Bond issuance is intended to collect funds for business operations and development. Like any loan agreement, the bond is issued with a predetermined maturity date and preset interest rates.
Bonds’ features vary depending on the different issuing entities, and the tax implications vary depending on the investors and certain bond characteristics. Below are the different types of taxation-based categories for corporate bond investments.
Regular Taxable Corporate Bonds
These bonds are taxed as per India’s IT Act guidelines. The total earnings from regular taxable corporate bonds can be divided into two sections – interest and capital gain. The following are the two types of taxes imposed on both.
Tax on Interest rates
The interest rates received on corporate bonds are deemed taxable and are taxed as per the individual tax slab rates. The accumulated interest is added to the investors’ gross total income, and then the tax slab is determined.
For example, suppose an individual investor (age below 60) has invested INR 2,00,000 in a corporate bond at a 10% rate. The interest payout, hence, will be INR 20,000. If we assume the investor’s gross total income is INR 10,00,000. The revised gross total income will become INR 10,20,000.
With that calculation in mind:
- As per the old tax regime, the investor will fall into the ‘above INR 10,00,000’ tax slab and be taxed at 30%.
- Under the new regime, the investor will fall into the ‘INR 9,00,000 to INR 12,00,000’ tax slab and be taxed at 15%.
Tax on Capital Gain
The payout structure of regular bonds involves periodic payouts of the interest and the principal amount redemption on the day of maturity. However, suppose an investor decides to sell the bond before maturity and receives a higher amount than the original purchase price. In that case, the difference between the original purchase and the current sale price will be considered capital gain.
Bonds will be taxed at different rates based on their holding period. Note that the holding period parameter can differ for bonds listed or unlisted on the National Stock Exchange.
The table below accurately explains the capital gains tax on corporate bonds India.
| Bond Type | Holding Period | Tax Type | Tax Rate |
|---|---|---|---|
| Listed Bonds | Less than 12 months | Short-Term Capital Gain (STCG) Tax | Applicable tax slab rates |
| More than 12 months | Long-Term Capital Gain (LTCG) Tax | 10% | |
| Unlisted Bonds | Less than 36 months | Short-Term Capital Gain (STCG) Tax | Applicable tax slab rates |
| More than 36 months | Long-Term Capital Gain (LTCG) Tax | 20% |
Zero-Coupon Corporate Bonds
Certain corporate bonds do not offer any coupon or interest but attract investors with discounted prices. The bond is held till maturity, and the investor will receive the actual face value of the bond.
Here is how the tax on corporate bonds with zero coupons works!
- Since there is no interest accumulation and periodic payment, interest tax does not apply here.
- Short and long-term capital gain taxes are applicable at the same rate as regular taxable corporate bonds (refer to the table above).
Market Linked Corporate Bonds
These corporate bonds are linked to an index. Interest is paid only if the rate is higher than the index performance. The interest and the short-term and long-term capital gains are taxable.
The tax implications of such bonds are similar to those of regular taxable corporate bonds.
Tax-Free Bonds and Tax Saving Bonds
Generally, the government and PSUs issue tax-free bonds at a lower rate than regular bonds. The interest earned under these bonds has no tax implications, but the capital gains are taxed at STCG and LTCG rates.
Tax-saving bonds, on the other hand, are not tax-free. They can help investors save tax on long-term capital gains from selling assets or properties like buildings or land. Here are the conditions for receiving the benefits:
- The investment must be below INR 50,00,000.
- The sale and investment must not be more than 6 months apart.
- A 100% exemption applies to long-term capital gains, but the interest tax remains at the slab rate.
Are the Tax Benefits Applicable for Corporate Bonds?
There are no tax-free and tax-saving corporate bonds available. Hence, such tax benefits do not apply.
TDS
As stated in the new amendment in Budget 2023, TDS, or tax deducted at the source, applies to interest earned on corporate bonds. If the interest accumulation is more than INR 5,000, 10% TDS will be charged.
Investors can present form 15G (for those below the age of 60) and 15H (for those above 60) at the beginning of the year to prove their income is less than the taxable limit and avoid paying TDS.
A Quick Recap: How are Corporate Bonds Taxed?
Corporate bonds are subjected to four types of taxes:
- Interest Tax
- Short-Term Capital Gain Tax
- Long-Term Capital Gain Tax
- TDS
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FAQs About Corporate Bonds
1. How are corporate bonds taxed in India?
The taxes apply to corporate bonds for both interest and capital gains. The interest is taxed as per the individual tax slab. Short-term capital gains are applied as per the slab rates if the bond is held for less than 12 months in the case of listed bonds, whereas the same STCG is applied for unlisted bonds if held for less than 36 months.
The long-term capital gain tax for listed bonds if held for more than 12 months is 10% and 20% for unlisted bonds if held for more than 36 months. Zero coupon bonds offered by corporations have no tax on interest, whereas capital gains are taxed as per regular bonds. Also, the TDS is applied to the interest income of the bonds if it exceeds INR 5,000 in the financial year unless the form 15G/H is submitted.
2. What is the tax rate on capital gains from a 5-year bond?
A 5-year bond, whether listed or unlisted, is considered a long-term capital gain. The same will be taxed at 10% for listed and 20% for unlisted bonds.
3. What is the discount on a bond?
The discount here refers to the discount on the bond’s face value. The bonds are offered to investors at a discounted price. There is no interest payment, but the investors receive the original face value.
4. Should I choose the old or new tax regime?
The tax rates under both regimes range between 5% and 30%. However, the new regime has higher thresholds than the old regime. For example, the old regime charges a 30% tax for income over INR 10 lakhs, while the new regime charges the same when the income crosses the INR 15 lakh threshold. Likewise, the new regime offers tax exemptions on incomes up to INR 3 lakhs, while the old regime offers the same up to INR 2.5 lakhs.
5. What are 54 EC bonds?
54 EC Bonds or capital gains bonds allow investors to save on longer-term capital gain taxes in the event of the sale of a property or asset.
6. What is the highest possible rating for corporate bonds?
AAA is the highest possible rating corporate bonds can receive.
7. Do corporate bonds pay income?
Corporate bonds can create a source of income by providing periodic payouts of interest.
8. When is the last date for filing Form 15G?
You can submit Form 15G once throughout the financial year. It is best to submit at the beginning of the year to ensure no TDS is deducted. The same rule applies to Form 15H.
