How bonds are taxed in India

Which Act applies: the 2025 Act from 1 April 2026

Section 1(3) of the Income-tax Act, 2025 brings it into force on 1 April 2026, and section 536(1) repeals the Income-tax Act, 1961. The new Act drops the old pair of 'previous year' and 'assessment year' for a single 'tax year', which section 3 defines as the twelve-month financial year beginning on 1 April. Interest received and bonds sold between 1 April 2026 and 31 March 2027 fall in tax year 2026-27.

Earlier years stay with the old Act. Section 536(2)(c) provides that assessments, reassessments, rectifications, appeals and other proceedings for a year that began before 1 April 2026 continue under the repealed Act. This guide describes the 2025 Act, which governs income from 1 April 2026.

Notifications carry over. Section 536(2)(j) keeps circulars and notifications issued under the 1961 Act in force so far as they are consistent with the new Act. That is what keeps bonds notified as tax-free under the old Act tax-free today; the tax-free bonds guide explains it.

Interest is taxed at your slab rate

Section 2(60) defines 'interest on securities' as interest on a Central or State Government security, and on debentures or other securities issued by a local authority, a company or a statutory corporation. Section 92(2)(e) charges it under the head 'Income from other sources'. There is no special rate for bond interest: it is added to the rest of your income and taxed at your slab rate.

Section 202 sets the default regime, which applies unless you opt out. Its slabs for an individual are nil up to ₹4,00,000, then 5%, 10%, 15%, 20% and 25% on each further ₹4,00,000, and 30% above ₹24,00,000. Under that regime the Chapter VIII deductions, including section 123 (the old 80C), are not allowed apart from a few listed exceptions. This guide does not cover surcharge, cess or rebate.

Tax deducted at source is not the final tax. Section 390(5) treats the amount deducted as tax paid on your behalf, so you claim it as a credit against the tax on your total income. If the tax on your income is more than the TDS, you pay the balance; if it is less, you claim the excess as a refund when you file.

TDS on bond interest

Section 393(1) sets out tax deduction for payments to residents. Serial 5(i) of its table covers 'any income by way of interest on securities' paid by any person: tax is deducted at the 'rates in force' once the interest paid or credited to you in the tax year crosses ₹10,000, and then on the whole amount. Section 2(90) takes the 'rates in force' from each year's Finance Act. For 2026-27, Part II of the First Schedule to the Finance Bill, 2026 sets 10% for a resident person other than a company on interest on listed company debentures, on debentures of a local authority or statutory corporation and on Government securities. CBDT's TDS rate chart for the Finance Act, 2026 also shows 10%.

Section 393(4) lists the interest on which no tax is deducted. Its serial 6 covers interest on Central and State Government securities, except the 8% Savings (Taxable) Bonds 2003, the 7.75% Savings (Taxable) Bonds 2018, the Floating Rate Savings Bonds 2020 (Taxable) and any other security the government notifies; there is no such entry for corporate debentures, listed or not. Serial 7(c)(v) covers zero-coupon bonds issued on or after 1 June 2005 by an infrastructure capital company or fund, an infrastructure debt fund, a public sector company or a scheduled bank.

For comparison, interest on bank, co-operative bank and notified post-office deposits sits in serial 5(ii), with thresholds of ₹50,000, or ₹1,00,000 for a senior citizen.

Stopping TDS with a nil-tax declaration (Forms 15G and 15H)

If the tax on your estimated total income for the year is nil, section 393(6) lets a resident individual give the payer a written declaration, in duplicate and in the prescribed form, and the payer then does not deduct tax on interest on securities, among other payments. The Note to the section adds a second condition for everyone except a resident aged 60 or more: the declaration is not available once the interest and the other payments the section lists (dividends, rent and insurance commission, for example) credited or paid to you in the tax year add up to more than the maximum amount not chargeable to tax (the basic exemption limit). It replaces section 197A of the 1961 Act, under which these declarations were Forms 15G and 15H (15H for people aged 60 or more). We did not read the Income-tax Rules that prescribe the form under the new Act, so ask the issuer or its registrar which form it accepts.

The declaration cannot be used where the income it covers for the year exceeds the maximum amount that is not chargeable to tax, unless you are a resident aged 60 or more. It only stops the deduction: the interest is still taxable and still has to be reported in your return.

From 1 April 2027, section 393(6)(b), inserted by the Finance Act, 2026, lets the declaration for listed securities held in demat, including interest on securities, be given electronically to the depository instead of to each payer.

Capital gains when you sell a bond

If you sell a bond for more or less than you paid, the difference is a capital gain or loss. Section 72 computes it as the sale value, minus the expenses of the transfer, minus the cost of acquisition. Section 72(2) allows indexed cost only for land or buildings, so there is no indexation on bonds, and section 72(3) disallows interest paid and securities transaction tax as deductions. Section 2(109) defines a transfer to include a sale and the extinguishment of rights in an asset, and expressly includes the maturity or redemption of a zero-coupon bond.

The holding period decides the rate. Section 2(101) makes an asset short-term if it is held for 24 months or less, and 12 months or less for a listed security, a UTI unit, a unit of an equity-oriented fund or a zero-coupon bond. A listed bond or NCD held for more than 12 months is therefore long-term, and section 197(1)(b) taxes long-term gains at 12.5%. Bonds get no concessional short-term rate: the special rate in section 196 covers only equity shares, equity-oriented fund units and business-trust units on which securities transaction tax is paid, so a short-term gain on a bond is taxed at your slab rate.

Section 76 overrides the holding period for three kinds of debt. A gain on the transfer, redemption or maturity of a Market Linked Debenture, of units of a Specified Mutual Fund acquired on or after 1 April 2023, or of an unlisted bond or debenture transferred, redeemed or maturing on or after 23 July 2024 is short-term however long you held it. A Specified Mutual Fund is one that invests more than 65% of its proceeds in debt and money-market instruments, or one that invests 65% or more in such funds; the Bharat Bond ETF guide shows how this applies to a debt ETF.

The yearly exemption on long-term gains in section 198 (the old 112A) covers only equity shares, equity-oriented fund units and business-trust units with securities transaction tax paid, so it does not apply to bonds. For a resident individual or HUF, section 197(2) does let any unused basic exemption limit reduce long-term gains.

Tax-free bonds: exempt interest, taxable gains

Interest on bonds notified as tax-free under section 10(15)(iv)(h) of the 1961 Act stays exempt through section 536(2)(j), which keeps those notifications in force so far as they are consistent with the new Act. Exempt incomes now sit in section 11 and Schedule II. Items 11 to 13 of Schedule II cover notified Central Government securities and bonds, Gold Deposit Bonds and gold monetisation deposit certificates, and notified bonds of a local authority or a State Pooled Finance Entity. No Schedule II entry names public-sector-company bonds, so their exemption rests on the carried-over notification; see tax-free bonds.

Only the interest is exempt. A gain or loss on selling a tax-free bond follows the listed-security rules in the table above.

Section 85 (the old 54EC) is a different relief. It exempts a long-term gain on land or a building that you invest, within six months, in notified bonds such as those of NHAI and REC, up to ₹50 lakh across the year of the transfer and the next. The bonds' own coupon is not covered by the relief and is taxed at slab, and transferring the bonds, converting them or taking a loan against them within five years brings the exempted gain back to tax. See Section 85 (54EC) bonds.

Old section numbers and their 2025 Act equivalents

Older KYB bond guides, issuer documents and many websites still cite the 1961 Act. This table maps the sections those guides use to the provision that now covers the same subject.

Reporting bond income in your return

Report coupon received as income from other sources and claim the TDS deducted against your PAN as a credit. Report interest from notified tax-free bonds as exempt income. Report each sale, and each redemption or maturity that section 76 or section 2(109) treats as a transfer, as a short-term or long-term capital gain using the table above, with dates and amounts from your contract notes or demat statement.

Before filing, match the TDS credit against the tax department's annual statement for your PAN. We did not read the return forms for tax year 2026-27, so this guide does not name the form or schedule to use.

What this guide does not cover

Tax depends on your own facts. This page summarises the Act's text for a resident individual holding bonds as an investment; check the current provision and your position with a qualified tax adviser before acting on it.

• Non-residents, tax treaties and the separate TDS table in section 393(2).
• Surcharge, health and education cess, and the rebate.
• Capital losses and how they are set off and carried forward.
• How the interest accrued between coupon dates is taxed when you buy or sell a bond mid-period; the selling bonds guide explains how it is priced.
• TDS where no PAN is furnished, and the old regime's deductions in detail.
• Companies, firms, trusts, and bonds held as stock-in-trade.