Taxation on bonds

Treasury Bonds (T-Bonds) in India, such as Government Securities (G-Secs) and Treasury Bills (T-Bills), have specific tax rules:

✅ 1. Interest on Treasury Bonds (G-Secs)

• Fully taxable as per your income tax slab
• If annual interest exceeds ₹5,000, TDS @10% is deducted (if PAN is provided)

✅ 2. Capital Gains on Selling Treasury Bonds

• Short-Term Capital Gains (STCG) (if held for less than 12 months)

  • Taxed as per your slab rate

• Long-Term Capital Gains (LTCG) (if held for more than 12 months)

  • Taxed at 10% without indexation or 20% with indexation

✅ 3. Treasury Bills (T-Bills) Taxation

• T-Bills are zero-coupon bonds, meaning no interest is paid
• The difference between the purchase price and maturity value is treated as STCG and taxed as per your slab

If you sell a bond at a loss, it is classified as a capital loss, and you can use it to reduce your tax burden:

✅ 1. Short-Term Capital Loss (STCL) (Holding Period: ≤12 months for listed bonds, ≤36 months for unlisted bonds)

• Can be set off against any capital gains (short-term or long-term) in the same financial year
• If not adjusted, it can be carried forward for up to 8 years and set off against future capital gains only

✅ 2. Long-Term Capital Loss (LTCL) (Holding Period: >12 months for listed bonds, >36 months for unlisted bonds)

• Can only be set off against long-term capital gains (LTCG)
• If not used, it can be carried forward for 8 years

✅ 3. Loss on Tax-Free Bonds

• Even though interest is tax-free, capital losses can still be set off against capital gains

Yes, zero-coupon bonds (ZCBs) are taxed differently because they do not pay periodic interest but are issued at a discount and redeemed at face value. Here's how they are taxed:

✅ 1. Interest Income – No Annual Taxation

• Since no periodic interest is paid, there is no tax on accrual
• Entire gain (difference between purchase price & redemption price) is taxed as capital gains

✅ 2. Short-Term Capital Gains (STCG)

• If sold within 12 months (listed bonds) or within 36 months (unlisted bonds) → Taxed as per your income tax slab

✅ 3. Long-Term Capital Gains (LTCG)

• If held for more than 12 months (listed bonds) → Tax @10% without indexation
• If held for more than 36 months (unlisted bonds) → Tax @20% with indexation

✅ 4. No TDS Deduction

• Unlike regular bonds, there is no TDS on zero-coupon bonds since no interest is paid

To correctly report bond interest income in your Income Tax Return (ITR), follow these steps:

✅ 1. Identify the Type of Bond Interest

• Taxable Bonds (Corporate, Government Bonds, NCDs) → Fully taxable as "Income from Other Sources"
• Tax-Free Bonds (NHAI, PFC, IRFC, etc.) → No tax, but report under "Exempt Income"
• Zero-Coupon Bonds → No annual tax; capital gains taxed at redemption or sale

✅ 2. Check for TDS Deducted

• If interest exceeds ₹5,000, TDS @10% is deducted
• Verify TDS in Form 26AS & AIS (Annual Information Statement)

✅ 3. Include Interest in ITR Form

• ITR-1 (for salaried individuals) → Report taxable bond interest under ‘Income from Other Sources’
• ITR-2/ITR-3 (if you have capital gains) → Report bond sales under ‘Capital Gains Schedule’

✅ 4. Claim TDS Credit

• If TDS was deducted, claim credit in the TDS schedule of ITR to avoid double taxation

✅ What is OID?

• Original Issue Discount (OID) refers to bonds issued at a price lower than face value and redeemed at full value upon maturity.
• The difference between the purchase price and redemption price is considered interest income rather than capital gain.
• Common in zero-coupon bonds and deep-discount bonds.

✅ Taxation of OID in India

• For Investors Holding Till Maturity:

  • The total OID (gain) is taxed as interest income under "Income from Other Sources" in the year of redemption.
  • Taxed as per your income tax slab.
  • No TDS deduction for retail investors.

• For Investors Selling Before Maturity:

  • If sold within 12 months (listed bonds) or 36 months (unlisted bonds) → Taxed as STCG (as per slab rate).
  • If sold after 12 months (listed) or 36 months (unlisted) → Taxed as LTCG @10% (without indexation) or 20% (with indexation for unlisted bonds).

Corporate bonds in India are fully taxable, but the tax treatment varies based on interest income and capital gains.

✅ 1. Tax on Interest Income

• Interest from corporate bonds is fully taxable under "Income from Other Sources"
• Taxed as per your income tax slab
• TDS @10% if interest exceeds ₹5,000 per financial year (for listed bonds)

✅ 2. Tax on Capital Gains (If You Sell Before Maturity)

• Short-Term Capital Gains (STCG):

  • Listed Bonds: If held ≤12 months, taxed as per slab rate
  • Unlisted Bonds: If held ≤36 months, taxed as per slab rate

• Long-Term Capital Gains (LTCG):

  • Listed Bonds (held >12 months): Taxed @10% without indexation
  • Unlisted Bonds (held >36 months): Taxed @20% with indexation

✅ 3. Tax-Free & Zero-Coupon Corporate Bonds

• Tax-Free Bonds (e.g., NHAI, PFC, IRFC): Interest fully exempt under Section 10(15), but capital gains are taxable
• Zero-Coupon Bonds: Taxed as capital gains upon redemption or sale

When buying bonds at a premium (above face value) or discount (below face value), taxation depends on how the bond is held and sold.

1️⃣ Bond Purchased at a Premium

• Interest Income Taxation: Interest is fully taxable as per slab rate.
• Capital Loss at Maturity: If you bought a bond at a premium and hold it until maturity, the premium amount is not deductible as a loss.
• Capital Gains on Sale:
  • If sold before maturity, the loss due to premium paid can reduce taxable capital gains.
  • If the bond is unlisted, LTCG tax applies @20% with indexation after 36 months.

2️⃣ Bond Purchased at a Discount

• OID (Original Issue Discount) Bonds:
  • The difference between the purchase price and redemption price is taxed as interest income at maturity (not capital gains).
  • Taxed as per income tax slab.
• Discounted Market Bonds:
  • If sold before maturity, the gain is taxed as capital gains.
  • If held more than 12 months (listed) → LTCG @10% without indexation.
  • If held more than 36 months (unlisted) → LTCG @20% with indexation.

To ensure accurate tax reporting and compliance, bond investors should maintain the following records:

✅ 1️⃣ Purchase & Sale Documents

• Bond purchase contract (Invoice, trade confirmation)
• Bond sale/redemption statement
• Brokerage statements showing transaction details

✅ 2️⃣ Interest Income Records

• Interest payment receipts (Quarterly/Half-yearly/Annually)
• Form 16A (TDS Certificate) if TDS was deducted on interest
• Bank statements reflecting bond interest deposits

✅ 3️⃣ Tax Deduction & TDS Proofs

• Form 26AS & AIS (Annual Information Statement) to verify reported interest & TDS
• 1099-INT or equivalent for foreign bonds (if applicable)

✅ 4️⃣ Capital Gains/Loss Statements

• Cost of acquisition & sale price breakdown
• Indexed cost calculation (for unlisted bonds held >36 months)
• Short-Term & Long-Term Capital Gains (STCG/LTCG) computation

✅ 5️⃣ Tax-Free Bond Details (If Applicable)

• Proof of investment in tax-free bonds (like NHAI, PFC, IRFC)
• Documentation to support exemption under Section 10(15)

✅ 6️⃣ Holding Period & Maturity Records

• Maturity schedule for tracking redemption gains
• Original Issue Discount (OID) details for deep-discount bonds