Taxation on Gains from Bond Investment in India

Taxation on Gains from Bond Investment in India

Before we get into further details, let’s look at a few fundamental points.

The slab system defines the tax rate applicable to individuals considering age and income. Individuals can be resident or non-resident or HUF or Association of Person or Body of Individual or any other artificial juridical person. The applicable tax rate is called the slab rate. To know your slab rate, you can refer to the notice served by the Income Tax Department.

TDS will not be deducted on interest received from listed bonds and debentures.

Bonds provide coupon payments and return principal amount on maturity. Firstly the coupon payments are the gains from bond investment; hence they are taxable. Secondly, you may sell bonds in the secondary market before maturity, or you may hold bonds till maturity. In either of the cases, if there is capital gain, then the gains are taxable.

The bonds listed on the National Stock Exchange are Listed Bonds, and bonds that are not listed on the National Stock Exchange are called Unlisted Bonds.

Short Term Capital Gain Tax is applicable if you sell listed bonds before 12 months(it is 36 months in the case of unlisted bonds).

Long Term Capital Gain Tax is applicable if you hold listed bonds for more than 12 months or hold unlisted bonds for more than 36 months. Refer to the table below.

Taxation of bonds in India can be explained in four sections.

Section - 1

Regular Taxable Bonds

Section – 2

Tax-Free Bonds

Section – 3

Tax Saving Bonds

Section – 4

Zero-Coupon Bonds

Regular Taxation Of Bonds in INDIA The interest earned from Bonds is taxed as per marginal slab rate, and the maximum slab rate is 30 %. Appreciation of the bond price is considered as capital gain and taxed accordingly. If these bonds are held for the long term ( more than 12 months for listed bonds and more than 36 months for unlisted bonds), the capital gain tax will be 10 %. Short-term capital gain tax can be 5% to 30%.

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Tax-Free Bonds

In the case of Tax- free bonds, the interest earned from bonds is not taxed, but price appreciation of the bonds during maturity (or sale) is considered as capital appreciation. Hence capital gain taxes are applicable. Considering the holding period, either LTCG or STCG, will be applicable.

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Tax Saving Bonds

54EC Bonds are Capital Gain Tax Exemption Bonds that provide100% tax exemption on the long term capital gain earned by selling any property. These bonds are the best options to save tax after the property sale. But conditions apply, such as the time gap between property sale and bond investment can not exceed six months. Also, the investment limit in 54EC Bonds is 50 lakhs.54 EC Bonds do not provide any exemption on short term capital gains.

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Zero-Coupon Bonds

Zero-coupon bonds do not pay interest, but they are sold at a discount and return full face value on redemption. Investors of Zero-Coupon Bonds are subjected to capital gains tax only. Price appreciation during the sale or maturity is considered as capital gain and taxed accordingly.

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