Tax on bonds in India: what you actually keep

Written for FY 2026-27. Updated Jul 2026 alongside 184 bonds tracked daily by RightBonds.

Bond yields are quoted before tax. That is why a listing showing 14.5% and a fixed deposit at 7% are never as far apart in your bank account as they look on screen. Two separate taxes decide what you keep: one on the coupon you receive along the way, another on any gain if you sell before maturity. This guide covers both, plus TDS, the special cases, and the arithmetic that tells you whether a bond still beats an FD once the tax office is paid.

The two taxable events

Every bond produces income in up to two ways, and each is taxed under different rules.

Hold a bond to maturity that you bought at face value and only the first column applies. Buy below face value on the exchange, or sell early at a profit, and the second one joins in.

Tax on coupon interest

Coupon income is added to your total income and taxed at whatever marginal rate you land in. There is no concessional rate for bond interest and no deduction to shelter it: Section 80TTA and 80TTB apply to bank and post office deposits only, so a senior citizen who moves money from an FD into bonds gives up the deduction 80TTB would have allowed on that deposit interest.

Interest is taxed on the year it accrues or is received, so a bond paying annually in March lands entirely in that financial year, while a quarterly payer spreads across four.

TDS on bond interest

This changed recently and a lot of older articles still get it wrong. Interest on listed securities held in demat form used to be exempt from TDS under a proviso to Section 193. That exemption was withdrawn with effect from 1 April 2023. Issuers now deduct 10% TDS on interest paid to resident investors once annual interest on that security crosses the threshold set in the Act, which is revised from time to time.

• TDS is not the final tax. It is an advance credited against your total liability. At the 30% slab you still owe the balance; below the taxable limit you claim it back.
• No PAN means 20% instead of 10%, so keep PAN updated with the RTA and your depository.
• Form 15G or 15H filed with the issuer or its registrar stops the deduction if your total income is below the taxable limit. 15H is for senior citizens.
• Check your AIS. Interest credited and TDS deducted appear in the Annual Information Statement and Form 26AS. Reconcile before filing, because the department matches against that data.

Capital gains on bonds

If you sell before maturity, or redeem a bond you bought at a discount, the profit is a capital gain. The rules changed materially in July 2024 and now hinge on one thing above all: whether the bond is listed.

The unlisted row is the one that catches people out. Under Section 50AA, gains on transfer, redemption or maturity of unlisted bonds and debentures are deemed short-term and taxed at slab, however long you held them. There is no path to the 12.5% rate on unlisted paper, which is a real argument for sticking to listed bonds bought through a demat account.

Indexation no longer helps here. The benefit that used to lift the cost of a long-held debt investment for inflation was withdrawn for debt instruments, and the current long-term rate of 12.5% is a flat rate applied to the raw gain.

One practical point when you sell a bond before maturity: the accrued interest embedded in the price you receive is interest in substance, and the way a broker splits your sale proceeds between price and accrued interest affects which head the income falls under. Keep the contract note, it shows the split.

The special cases

Tax-free bonds

Coupons on the PSU tax-free bonds issued between 2012 and 2016 are exempt from income tax under Section 10(15), with no TDS and nothing to add to your return. That exemption covers the interest only: sell one on the exchange at a profit and normal capital gains rules apply. To a 30% taxpayer, a tax-free coupon is worth about 45% more than the same coupon taxed at slab, which is why these bonds trade at a premium and why their quoted yields look low next to a corporate bond.

54EC capital gain bonds

Bonds from REC, PFC, IRFC and NHAI that let you defer tax on long-term capital gains from selling land or a building. Invest the gain within six months of the sale, up to ₹50 lakh, and it is exempt under Section 54EC. The trade-offs: a five-year lock-in, an interest rate well below what the corporate bond market pays, and that interest is fully taxable at your slab. You are buying a tax exemption, not a yield.

Zero-coupon and deep discount bonds

There is no coupon to tax, so the entire return is the gap between what you paid and what you receive. For bonds notified by the government as zero-coupon bonds, that gap is treated as a capital gain on maturity. For anything not notified, the accretion is generally taxed as interest, which is the far less attractive outcome, so check the classification before buying.

Sovereign gold bonds

The 2.5% interest is taxable at slab. The capital gain on redemption by an individual holder is exempt, which is the standout feature. Sell on the exchange instead of holding to redemption and that exemption is lost, with normal capital gains applying.

What a 12% bond actually pays you

Multiply the headline yield by one minus your effective tax rate, remembering the 4% health and education cess on top of the slab rate. A 30% slab is really 31.2%.

Two things fall out of this table. First, tax narrows the gap but does not close it, because both instruments are taxed the same way on interest. Second, the higher your slab, the more valuable the exceptions become: a tax-free bond or the capital gains route on a listed bond held over a year is worth far more to a 30% taxpayer than to a 5% one.

If you are an NRI

Interest paid to a non-resident is withheld at source under Section 195, at a higher rate than the 10% that applies to residents and commonly at 20% plus surcharge and cess. A tax residency certificate together with Form 10F can bring that down where the applicable double taxation avoidance agreement provides a lower rate. Whether you can then claim credit in your country of residence depends on that treaty. The mechanics of accounts and repatriation are covered in the NRI bond investing guide.

Records worth keeping

• Contract notes for every buy and sell, showing the clean price and accrued interest separately.
• Interest certificates from the issuer or RTA at year end.
• AIS and Form 26AS downloads, reconciled against your own record before you file.
• Demat holding statements at 31 March, which fix your holding period if a sale is questioned.

This guide explains the general treatment for a resident individual investor and is not tax advice. Rates, thresholds and section numbers change with each Finance Act. Confirm your own position with a chartered accountant before you act.

Frequently asked questions