How bonds are taxed in India: interest, gains and TDS
Interest from a bond is added to your income and taxed at your slab rate. If you sell a listed bond after more than 12 months, the gain is taxed at 12.5%; sold sooner, at your slab rate. Gains on unlisted bonds are always taxed at your slab rate. Tax-free bonds exempt only the interest.
In this guide
Key takeaways
- Bond interest is added to your income and taxed at your slab rate, whether or not tax was deducted at source.
- A listed bond sold after more than 12 months gives a long-term gain taxed at 12.5%. Sold within 12 months, the gain is taxed at your slab rate.
- Gains on unlisted bonds and debentures are taxed at your slab rate, however long you hold them. This applies on a sale or maturity on or after 23 July 2024.
- 54EC bonds exempt a long-term gain on land or a building. They are not a section 123 deduction and not tax-free bonds.
- A bond fund's own income is exempt, so you are taxed only when you sell units, not on the interest the fund earns.
A bond is a loan you make to a government or a company. It pays you interest, called the coupon, and returns your money, the face value, on a set date, called maturity. A bond gives you two streams of income that are taxed differently. The interest is added to your income and taxed at your slab rate every year. A gain or loss when you sell the bond, or when it matures, is taxed as a capital gain. A capital gain is the profit when you sell for more than you paid.
The rules below are for a resident individual under the Income-tax Act, 2025, which applies from 1 April 2026 and replaced the earlier Income-tax Act. Your slab rate is the rate your total income falls under, and the Act now speaks of a "tax year" where it once spoke of a "previous year". On top of the tax itself, you pay cess, an extra 4% charge on the tax.
How is interest on bonds taxed?
Interest on a bond is added to your income and taxed at your slab rate. The Act files it under "Income from other sources", which covers interest on securities such as debentures issued by a company and securities of the Central or a State Government (section 92 and section 2(60)).
The year you pay tax depends on the method you regularly follow. On the mercantile or accrual method, interest is taxed as it builds up each year. On the cash method, it is taxed when you receive it.
Here is an illustration with assumed numbers, not an offer. Say you hold ₹6,00,000 in a listed bond, one listed on a recognised stock exchange in India, with a 7.5% coupon. That is ₹45,000 of interest a year. If you are in the 30% slab, with no rebate and income below ₹50 lakh so no surcharge, the tax is ₹13,500 plus ₹540 of cess: ₹14,040 a year. In the 20% slab it would be ₹9,000 plus ₹360, or ₹9,360.
Is TDS cut on bond interest?
For some bonds, yes. TDS means tax deducted at source: the payer deducts a part of your interest before it reaches you. You may also hear it called withholding tax.
For a resident, the rate is 10% on interest from listed company debentures and from debentures of a local authority or a statutory corporation. The deduction applies once the interest from one payer in a year goes above ₹10,000, and then it is cut on the whole amount.
If the bond in the example above is a listed company debenture, ₹4,500 of the ₹45,000 interest is deducted. It is not an extra cost. It counts as tax you have already paid for the year. If more was deducted than your tax comes to, you claim the difference back by filing your return.
Some interest carries no TDS at all: National Development Bonds, notified debentures, interest paid to insurers and business trusts, and securities of the Central or a State Government. For government securities, the exceptions are the taxable savings bonds the Act names, which include the Floating Rate Savings Bonds, 2020, and any other security the government notifies.
No TDS does not mean no tax. You still add the interest to your income and pay tax at your slab rate.
How are gains on selling a bond taxed?
Sell a listed bond after more than 12 months and the gain is taxed at 12.5%. Within 12 months it is added to your income and taxed at your slab rate. The holding period, the time between buying and selling, decides which rule applies. A gain is short-term or long-term depending on which side of the 12-month line you sell.
An unlisted bond is one that is not listed. Gains on unlisted bonds and debentures, and on market-linked debentures, are always taxed at your slab rate, however long you hold them. This applies to a sale, redemption or maturity on or after 23 July 2024. A market-linked debenture has a debt part, but its returns are linked to the market returns on other securities or indices.
A bond can sell at a gain or a loss before maturity because its price moves. SEBI's investor website says that when interest rates rise, bond prices may fall, and the other way round. Two illustrations, again with assumed numbers. You make ₹18,000 more than your cost on a listed bond.
| When you sell | Type of gain | Tax at the 30% slab |
|---|---|---|
| After 18 months | Long-term, 12.5% | ₹2,250 plus ₹90 cess = ₹2,340 |
| After 10 months | Short-term, slab rate | ₹5,400 plus ₹216 cess = ₹5,616 |
On an unlisted bond the same ₹18,000 gain is taxed at the slab rate whatever the holding period, so ₹5,616 at the 30% slab.
The 12.5% long-term rate comes with no adjustment for inflation. The ₹1,25,000 yearly allowance on long-term gains is for equity only, so it does not cover bonds. For that allowance, read tax on mutual fund redemption.
What if you sell a bond at a loss?
A short-term capital loss can be set off against gains from any other capital asset in that year. A long-term loss can be set off only against long-term gains. Neither can be set off against another head of income. If you cannot use the whole loss in the year, you can carry it forward for up to eight tax years. You can do this only if you filed your return by the due date.
Are tax-free bonds really tax-free?
The interest is. A gain on selling the bond is not. Interest on tax-free bonds is still exempt under the Income-tax Act, 2025 (Schedule II). If you sell the bond on the exchange, the gain is taxed like any listed bond: 12.5% if you held it for more than 12 months, and your slab rate if you did not.
What tax-free bonds are is covered separately.
What are 54EC bonds?
54EC bonds let you keep a long-term gain from selling land or a building out of tax, if you put that gain into specified bonds. They are a way to exempt a property gain. They are not a deduction under section 123 (the old Section 80C), and they are not the same as tax-free bonds.
The rule is section 85 (the old Section 54EC) of the Income-tax Act, 2025. The main conditions:
- The gain must be a long-term gain on land or a building, or both.
- You must invest within six months of the sale. The part of the gain you invest is not charged.
- The investment can be up to ₹50 lakh.
- The bond must be redeemable after five years and issued on or after 1 April 2018. The Act names the National Highways Authority of India and the Rural Electrification Corporation Limited as issuers, and allows other bonds the government notifies.
- If you sell the bond or turn it into money within five years, the exempted gain is taxed in that year. Taking a loan against the bond counts as turning it into money.
The same money cannot also be claimed under section 123; the Act says so. The interest on these bonds is not exempt, so it is taxed at your slab rate. They suit only someone with such a property gain.
How are zero-coupon bonds taxed?
A zero coupon bond as the Act defines it (below) gives you a capital gain when it matures or is sold. It pays no interest along the way: you buy it below face value, receive the full face value at maturity, and the difference is the gain.
Under the Act, a "zero coupon bond" is one issued on or after 1 June 2005 by an infrastructure capital company, an infrastructure capital fund, an infrastructure debt fund, a public sector company or a scheduled bank. It must pay nothing before maturity and be notified by the Central Government. A notified bond must have a life of 10 to 20 years, an investment-grade rating from two rating agencies and a listing in India.
Maturity or redemption of such a bond counts as a transfer. The gain is long-term after 12 months and taxed at 12.5%; within 12 months it is taxed at your slab rate.
A bond sold at a discount that the government has not notified is not a zero coupon bond under the Act. How such a bond is taxed is a question for the issuer or a tax adviser.
Bonds or a bond fund: how does the tax differ?
With a bond fund, you are taxed only when you sell units, not on the interest the fund earns. A SEBI-registered mutual fund's own income is exempt, so what the fund earns and trades inside creates no tax for you year by year.
Most debt funds hold more than 65% in debt and money market instruments, which makes them Specified Mutual Funds. Gains on units of such funds bought on or after 1 April 2023 are taxed at your slab rate, whatever the holding period. There is no TDS on a resident's redemption gains. Tax on debt mutual funds has the full rules.
Debt funds bought through Koshex are regular plans, and Koshex helps you choose a fund that suits your goal and timeline. Browse debt funds, corporate bond funds, gilt funds and target maturity funds.
To learn how bonds work and how to buy them, see what bonds are and corporate bonds and NCDs. Fixed deposit interest is covered in taxation of fixed deposits.