|
Getting your Trinity Audio player ready...
|
Bond interest is taxed at your income slab rate, listed long-term capital gains (held >12 months) are taxed at 12.5% without indexation, and unlisted bonds fall under slab rates. TDS applies at 10% on interest exceeding ₹10,000 annually under Section 193 of the Income Tax Act, or 20% if no valid PAN is provided.
As of 2026, the key LTCG/STCG rates in India are
| Investment / Asset | STCG | LTCG |
|---|---|---|
| Listed equity shares (STT applicable) | 20% | 12.5% above ₹1.25 lakh |
| Equity-oriented mutual funds | 20% | 12.5% above ₹1.25 lakh |
| Business Trusts / REITs / InvITs | 20% for specified STCG | 12.5% for specified LTCG |
| Listed bonds / debentures | Applicable slab rate | 12.5% |
| Unlisted bonds / debentures | Applicable slab rate | 12.5% |
| Gold / Gold ETFs | Generally slab rate if short-term | 12.5% if long-term |
| Debt mutual funds purchased on/after 1 Apr 2023 | Slab rate | Slab rate |
| Digital Gold / Physical Gold | Slab rate | 12.5% |
The 12.5% LTCG rate without indexation was introduced from 23 July 2024 and remains the relevant general LTCG rate in 2026.
Listed bonds held for more than 12 months are generally taxed at 12.5% LTCG without indexation, while gains on bonds held for 12 months or less are generally taxed at the applicable slab rate.
- Held for 12 months or less: STCG is generally taxed at your applicable income-tax slab rate.
- Held for more than 12 months: LTCG → 12.5% without indexation
Start investing with just ₹10K & grow your wealth with fixed return opportunities.
Invest Now
How is Bond Income Taxed in India?
Before getting into the rules, it helps to keep in mind that the Income Tax Act treats bond income in two different ways.
- Interest income: Every coupon payment you receive is treated as “Income from Other Sources” and taxed at your income slab rate. No special rate. No concessions. Just your slab.
- Capital gains: If you sell a bond at a profit, the profit is a capital gain. The taxation depends on how long you hold the bond and whether it is listed on a stock exchange or not.
Everything else in bond taxation sits between these two brackets. Staying mindful of this as we proceed will help.
How is Interest Income From Bonds Taxed?
Every time a bond pays you a coupon, the amount is added to your total annual income and taxed at your applicable slab rate depending on your total income.
Let’s establish this with an example:
Say you hold bonds worth ₹10 lakh at an 8% annual coupon rate. That’s ₹80,000 in annual interest income. If you fall in the 20% tax bracket, ₹16,000 of that is added straight to your tax. Your effective post-tax yield trickles down from 8% to 6.4%
That difference might seem small, but in the long term, it makes a big dent in your returns.
One thing that catches investors off-guard is cumulative bonds. These are bonds that pay your coupons as a lump sum at maturity instead of periodically. Investors might assume that they’ll be taxed when they receive the payment, but that’s not how it works. Under Indian tax law, interest on cumulative bonds is taxed on an accrual basis, which means you just add the interest for that year to your total income and get it taxed according to your slab, even if you haven’t seen a single rupee of it yet.
What is TDS on Bonds, and When Does it Apply?
Tax Deducted at Source, or TDS, is an advance tax deduction. The bond issuer will subtract it from the interest credited to your account, and you can avail yourself of it as a deduction in your final tax liability while filing your ITR.
Here’s how it works for bonds:
- The TDS is deducted at 10% under section 193 of the Income Tax Act if the interest earned is more than ₹10,000 in a financial year.
- 20% TDS applies if you haven’t provided a valid PAN to the issuer.
- Government securities (G-Secs) are generally exempt from TDS on interest for resident investors, but the income is still taxed at your slab rate.
- Form 121 (replacing earlier forms 15G and 15H) can be submitted to the issuer if your total income falls below the taxable threshold. This prevents TDS deduction, so you don’t have to wait for a refund.
Always verify TDS deducted against your bonds in Form 26AS before filing your ITR.
TDS (Tax Deducted at Source) Rules on Bonds
- Standard Rate: Under Section 193, TDS is deducted at 10% on interest payouts if the total interest earned exceeds ₹10,000 in a single financial year.
- PAN Penalty: If you fail to provide a valid PAN to the issuer or registrar, the TDS rate increases to 20%.
- TDS Avoidance: If your total taxable income is below the minimum exemption limit, you can submit Form 15G (for individuals under 60) or Form 15H (for senior citizens) to prevent TDS deduction upfront.
- Verification: Always verify that the deducted TDS appears in your Income Tax e-Filing Portal
Recent Post:
- Understanding DSRA and Escrow Accounts: How NCD Issuers Protect Your Coupons
- How to Read a Bond Credit Rating Rationale Report: A Guide for Investors
- FCNR Deposits vs. Corporate NCDs: Where Should NRIs Invest Surplus Cash in 2026?
Capital Gains on Bonds: The Listed vs. Unlisted Rules
This is where bond taxation gets its most important, and most misunderstood, distinction.
When you sell a bond at a profit before maturity, the gain is a capital gain. Whether it’s taxed as short-term or long-term further depends on two things: how long you hold the bond and whether it’s listed on a recognized stock exchange like BSE or NSE.
| Bond type | Holding period | Tax treatment |
| Listed bonds | More than 12 months | LTCG at flat 12.5% (no indexation) |
| Listed bonds | 12 months or less | STCG at slab rate |
| Unlisted bonds/debentures | Any holding period | STCG at slab rate |
| Tax-free bonds (sold before maturity) | More than 12 months | LTCG at 12.5% |
| Tax-free bonds (sold before maturity) | 12 months or less | STCG at slab rate |
| Sovereign Gold Bonds (held to maturity) | Full tenure | Capital gains (fully exempt) |
Two important announcements that investors are yet to adjust their portfolios to: unlisted bonds are now always treated as STCG, irrespective of holding period, and the indexation benefit has been removed from all categories of bonds. Both changes have a profound impact on post-tax returns for debt investors.
Special Bond Categories and How They are Taxed
- Tax-free bonds (NHAI, REC, PFC): Interest is fully exempt under Section 10(15). But selling before maturity triggers normal capital gains tax.
- 54EC bonds: Used to save capital gains tax on property sales. Invest up to ₹50 lakh within six months of the sale, lock in for five years, and the property gain is exempt.
- Zero coupon bonds: No interest payments are made during the life of a bond, so the gain at maturity is a capital gain. If the bond is listed and has been held for more than 12 months, then LTCG is applicable at the rate of 12.5%.
- Sovereign Gold Bonds: All interest earned on the bond is taxable as per the tax slab rates, while all capital gains on redemption on maturity are fully exempt.
Frequently Asked Questions: Bond Taxation in India
A: Yes. TDS is credited to the total tax liability at the time of filing of ITRs. Where more has been deducted than is actually due—since the person’s income is in a lower slab or is under the taxable threshold—the extra is returned to the bank account of the taxpayer directly by the Income Tax Department. This can only be done by filing an ITR on time.
A: Interest from both is taxed at your slab rate. No difference there. Bonds have an advantage on capital gains; the tax charged on the sale of a listed bond after 12 months is LTCG at 12.5%, whereas the slab rate tax applicable on the FD interest has no such advantage. If you are an investor who falls in this range and are comfortable with the secondary market, listed bonds may be tax-efficient as compared to FDs.
A: The rates remain unchanged—slab rate of interest on bonds, 12.5% LTCG on listed bonds, irrespective of the regime. What changes your taxable income? With the old regime, the base income from bond interest, on which the deduction is calculated, is reduced. In the new regime, the deductions have been eliminated, and the same interest income is taxed under a higher slab. The bigger your bond interest income, the more important the regime choice becomes.
A: No capital gains – ITR-1 will be fine if the income is only salary and bond interest. Any capital gains from selling bonds – ITR-2. Business or professional income alongside bond income – ITR-3. When in doubt, file one step up, because if you file the wrong form, it will mean a defective return notice.
A: Yes, TDS may apply to taxable bond interest when the applicable threshold is exceeded. The rate is generally 10%, subject to the type of bond, issuer, and applicable tax rules. TDS is only a tax credit and does not necessarily represent your final tax liability. The amount deducted can be claimed as credit while filing your ITR.
A: Yes. Bond interest is generally taxed as income from other sources at your applicable slab rate, whereas capital gains arise when you sell or redeem a bond for a profit. For listed bonds held for more than 12 months, the gain is generally treated as LTCG and taxed at 12.5% without indexation. Gains on listed bonds held for 12 months or less are generally taxed at the applicable slab rate.
A: Yes, the interest or coupon income earned during the holding period is generally taxable at your applicable slab rate. If the bond is redeemed at maturity at its original issue or purchase price, there may be no capital gain. However, if you purchased the bond at a price different from its redemption value, a capital gain or loss may arise depending on the circumstances and applicable tax rules
Disclaimer
Fixed returns do not constitute guaranteed or assured returns. Investments in corporate debt securities and municipal debt securities/securitized debt instruments are subject to credit risks, market risks, and default risks, including delay and/or default in payment. Read all the offer-related documents carefully. This blog/article should not be construed as financial advice or as an offer or recommendation to buy or sell any security or any products/services of/on GoldenPi or any product/services of its third-party client(s). For a detailed calculation of YTM, visit our website. T&C’s Apply.
