How Bonds Are Taxed in India (2024-25 Rules)

Bond taxation in India changed meaningfully in 2023 and again in Budget 2024. This guide covers coupon income tax, capital gains on listed and unlisted bonds, TDS rules, zero coupon bond taxation, and what the debt mutual fund tax change means for direct bond investors. Capital gains framework is current as of Budget 2026 (last reviewed July 2026); income tax slab rates below are FY 2024–25 and may not reflect Budget 2025/2026 slab tweaks — verify with a chartered accountant for your specific situation.

1. Interest (coupon) income

All coupon payments received from bonds — government or corporate — are taxed as "Income from Other Sources" at your applicable income tax slab rate. There is no special rate or exemption for bond coupon income (except for specific tax-free bonds, discussed below).

For FY 2024–25 slab rates under the new regime:

Add surcharge and cess as applicable. A 30% slab taxpayer pays approximately 34.32% (including 4% health and education cess) on coupon income.

2. TDS on bond interest

For listed debentures / NCDs: TDS is typically deducted at 10% for residents if the interest exceeds ₹5,000 per year from a single issuer. This threshold applies per issuer, not in aggregate across all bonds.

For Government Securities (G-Secs): TDS is generally not deducted on coupon payments to resident investors purchasing through RBI Retail Direct or recognised broker platforms. However, some state SDL payments may have TDS in specific circumstances — check the terms of the specific instrument.

NRIs face higher TDS rates (typically 30%+ before treaties). Verify the current DTAA rate applicable to your country of residence.

TDS is advance tax, not final tax. You claim credit for TDS in your Income Tax Return and pay or receive the difference based on your actual tax liability.

3. Capital gains on bond sales

When you sell a bond in the secondary market before maturity (or if it is called / redeemed at a price other than face value), you may have a capital gain or loss.

Listed bonds (BSE/NSE listed)

• Holding period ≤ 12 months: Short-term capital gain. Taxed at your slab rate.
• Holding period > 12 months: Long-term capital gain. Taxed at 12.5% (flat, no indexation — per Budget 2024).

Unlisted bonds (not listed on BSE/NSE)

• Holding period ≤ 24 months: Short-term capital gain. Taxed at your slab rate. (Note: Budget 2024 changed the LTCG threshold for unlisted bonds from 36 months to 24 months.)
• Holding period > 24 months: Long-term capital gain. Taxed at 12.5% (flat, no indexation — per Budget 2024).

Prior to Budget 2024, LTCG on unlisted bonds was taxed at 20% with indexation benefit. That indexation benefit has been removed. The trade-off: the rate came down from 20% to 12.5%, but inflation adjustment no longer reduces the taxable gain.

4. Zero coupon bonds

Zero coupon bonds (ZCBs) — including some G-Sec strips and certain NCDs — do not pay periodic interest. Instead, they are issued at a discount and redeemed at face value. The difference is the investor's return.

For tax purposes, the entire gain on a listed ZCB is treated as capital gain (short-term or long-term depending on the holding period). For unlisted ZCBs (which are common in structured finance), the discount accrues annually as notional income under Section 2(29A) — meaning you may have a tax liability even without receiving any cash. This is a significant complexity; consult a CA before buying unlisted ZCBs.

5. Tax-free bonds

Certain bonds issued by government-backed entities (NHAI, REC, IRFC, HUDCO, PFC, and others) under specific SEBI approvals carry tax-free interest. These were issued in tranches from 2012–2016 and continue to trade in the secondary market.

The coupon on these bonds is exempt from income tax under Section 10(15)(iv)(h). This makes them particularly valuable for investors in the 30% tax bracket — a 7% tax-free yield is equivalent to approximately 10.6% pre-tax for a 30% taxpayer.

Capital gains on the sale of tax-free bonds are not tax-exempt — only the coupon is. LTCG rules (12.5% after 12 months for listed) apply to any appreciation.

6. What the 2023 debt mutual fund change means for bond investors

From 1 April 2023, debt mutual funds that hold less than 35% in equity are taxed as short-term capital gains (at slab rate) regardless of holding period. The LTCG benefit (20% with indexation after 3 years) that made debt MFs popular for high-tax-bracket investors was eliminated.

This change does not directly affect direct bond investments. Direct bonds continue to have the LTCG benefit after 12 months (listed) or 24 months (unlisted). For investors who previously used debt MFs specifically for the tax treatment, direct bonds now offer a relatively more favourable structure — though the practical differences depend on your tax bracket and investment size.

7. Bond taxation for NRIs

NRIs can invest in most Indian bonds (G-Secs via RBI Retail Direct with NRE/NRO accounts, listed NCDs through SEBI-registered brokers). Key differences:

• TDS on bond interest is typically 30% (plus surcharge and cess) before DTAA benefits. DTAA treaties with most countries reduce this to 10–15% — you must file Form 10F and a tax residency certificate to claim the benefit.
• Repatriation of funds is possible from NRE accounts (not NRO, without specific RBI permission for large amounts).
• Capital gains are generally taxed at higher TDS rates for NRIs. Short-term gains may face 30%+ TDS at source.

Key takeaways

• Coupon income: taxed at your slab rate, always. TDS at 10% for most NCDs.
• Listed bond LTCG: 12.5% after 12 months, no indexation (Budget 2024).
• Unlisted bond LTCG: 12.5% after 24 months, no indexation (Budget 2024).
• Tax-free bonds: coupon exempt, capital gains are not.
• Zero coupon bonds: complex — listed ones have capital gains treatment; unlisted ones may have annual notional income.
• Debt MF tax change doesn't affect direct bonds — direct bonds still have a holding-period advantage.