Taxation of Bonds in India
In the Indian financial landscape of 2026, the taxation of bonds is governed by a combination of income tax slab rates and a revamped capital gains framework introduced in the 2024 and 2025 Union Budgets.
The tax you pay depends on two factors: the Interest Income (periodic payouts) and Capital Gains (profit made if you sell the bond before maturity).1
1. Taxation of Interest Income
Regardless of whether a bond is listed, unlisted, or government-backed, interest income is treated as "Income from Other Sources".2
- Tax Rate: It is added to your total annual income and taxed according to your applicable income tax slab rate (e.g., 5%, 20%, or 30%).3
- TDS (Tax Deducted at Source): A 10% TDS is generally deducted by the issuer if the annual interest exceeds βΉ10,000. You can claim this as a credit when filing your ITR.4
2. Taxation of Capital Gains (Sale/Redemption)
The 2024-25 reforms simplified these rates, primarily removing indexation benefits (adjusting for inflation) for most debt instruments.5
Bond Category | Holding Period (STCG) | Short-Term Tax (STCG) | Long-Term Tax (LTCG) |
|---|---|---|---|
Listed Bonds / G-Secs | β€ 12 Months | Tax Slab Rate | 12.5% (No Indexation) |
Unlisted Bonds | Any Duration | Tax Slab Rate | Deemed STCG (Tax Slab Rate) |
Debt Mutual Funds | Any Duration | Tax Slab Rate | Tax Slab Rate (No Indexation) |
Note: For Debt Mutual Funds purchased before April 1, 2023, legacy LTCG benefits (12.5% without indexation) may still apply if held for more than 24 months.6
3. Special Categories
Some bonds offer unique tax advantages to encourage specific types of investment:7
- Sovereign Gold Bonds (SGBs):
- Interest: Taxed at your slab rate.8
- Redemption at Maturity (8 Years): Entirely Tax-Free.9
- Secondary Market Sale: Taxed as capital gains (12.5% if held > 1 year).10
- Tax-Free Bonds (e.g., NHAI, IRFC):11
- Interest: Fully exempt from tax.
- Capital Gains: Taxable as per the standard listed bond rates (12.5% for LTCG).12
- 54EC (Capital Gains) Bonds:
- Used to save tax on profits from the sale of immovable property.13 Investment is capped at βΉ50 Lakh per year.
- Lock-in: 5 years.14 Interest is taxable at your slab rate.
4. The 2026 Strategic Takeaway
With the removal of indexation, the "tax alpha" of holding bonds for the long term has decreased.
- For High Earners (30% slab): Tax-free bonds or SGBs held to maturity are highly efficient.
- For Short-Term Parking: T-Bills or Liquid Funds are preferred, as the tax treatment is now identical to bank FDs but often with slightly better yields.