Taxation

Taxation of bonds in India

Q: Are Indian bonds tax-free?

Only specific bonds designated as tax-free bonds issued by government entities offer complete exemption from taxes on interest income. Regular taxable bonds have interest that is fully taxable as per your income tax slab.

Q: Is maturity of a bond taxable?

The taxation at bond maturity depends on the bond type. For regular taxable bonds, the principal amount returned at maturity is not taxable as it represents your original investment. However, if you sell a bond before maturity at a price higher than your purchase price, the capital gains are taxable based on the holding period. For zero-coupon bonds, the difference between the discounted purchase price and face value received at maturity is treated as income and taxed accordingly. Sovereign Gold Bonds offer complete capital gains tax exemption if held until the full 8-year maturity period.

Q: Is interest on bonds taxable?

Interest earned on bonds is generally taxable, with some exceptions. Interest on regular taxable bonds is fully taxable and added to your total income. Tax-free bonds offer complete exemption from interest income, making them attractive for high-income individuals.

Q: How to avoid TDS on bond interest?

To avoid Tax Deducted at Source (TDS) on bond interest, you can submit Form 15G if you are below 60 years or Form 15H if you are a senior citizen and your total income is below the taxable limit. These forms declare that your income is below the taxable threshold, exempting you from TDS. Providing your PAN details to the bond issuer can also reduce the TDS rate from 20 percent to 10 percent.

3 min read

Apr 27, 2026

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Taxation of bonds is important for optimising returns and making informed investment decisions. In India, bonds are subject to various tax implications depending on their type, holding period, and interest structure.
The taxation of bonds in India follows specific regulations that impact both interest income and capital gains, requiring careful consideration when planning your investment portfolio. Let's learn more about it.

Factors for taxation of bonds in India

1. Type of bond:

The tax treatment varies significantly between taxable bonds, tax-free bonds, tax-saving bonds, zero-coupon bonds, and sovereign gold bonds.

2. Holding period:

The duration for which you hold a bond directly impacts the capital gains taxation. For listed bonds, holding for more than one year qualifies for long-term capital gains (LTCG) treatment. For unlisted bonds redeemed on or after July 23, 2024, the gains would always be categorized as short-term capital gains (STCG) and taxed at the investor's tax slab rates.

3. Nature of income:

Bond investments generate two types of income—interest payments and capital gains/losses. Each is taxed differently, with interest typically taxed as per your income slab rate and capital gains taxed based on the holding period.

4. Listing status:

Whether a bond is listed or unlisted on recognised stock exchanges affects the applicable tax rates and holding period requirements for LTCG qualification.

Understanding these factors is essential for comprehensive taxation of bonds planning and optimising your investment strategy in the fixed-income segment.

Types of bonds

The Indian bond market offers various investment options, each with unique tax implications:

1. Taxable bonds:

These standard bonds generate interest income that's taxed according to the investor's income tax slab rate. Taxation on capital gains incurred on redemption depends on whether the bond is listed or not. The tax treatment is as follows -

Listed bonds - If you redeem the bonds within 12 months, the gain would be treated as STCG and taxed at your slab rates. However, if the bond is redeemed after 12 months, the gains earned are classified as LTCG and taxed at a rate of 12.5%.
Unlisted bonds - Capital gains on unlisted bonds that mature or are redeemed after 23rd July 2024 are always treated as STCG. Such gains would be taxed at your applicable slab rates.

2. Tax-free bonds:

These government-issued bonds offer tax-free interest income, making them attractive to high-income individuals. However, capital gains from selling these bonds before maturity are still subject to taxation based on the holding period. If you sell the bonds within one year, the capital gain would be taxed at 20%. On the other hand, if you sell the bonds after a year, you incur a LTCG, which would be taxed at 12.5% without the benefit of indexation.

3. Tax-saving bonds:

Such bonds offer deductions under Section 80CCF up to ₹20,000, reducing your overall tax liability. While the principal investment qualifies for tax benefits, the interest earned remains taxable at your income slab rate.

4. Zero-coupon bonds:

Unlike traditional bonds, these don't pay periodic interest but are issued at a discount to face value. The difference between the purchase price and redemption amount is considered income, taxed based on the holding period.

Taxation on interest & capital gains on different types of bonds

Bond type	Taxation on interest	Taxation on capital gains
Regular taxable bonds	Taxed as per income tax slab	Listed: LTCG (>1 year) taxed at 12.5% without indexation; STCG (<1 year) as per the income tax slab. Unlisted: For bonds maturing or being redeemed on or after 23rd July 2024, the capital gains would be treated as STCG and taxed at your slab rates.
Tax-free bonds	Interest income fully exempt from tax	LTCG taxed at 12.5% without indexation; STCG taxed at 20% if the bond is sold before maturity in the secondary markets.
Tax-saving bonds	Taxed as per income tax slab	Taxed based on holding period. Principal investment deductible under Section 80CCF up to ₹20,000
Zero-coupon bonds	No periodic interest payments	Discount to face value is taxed based on the holding period

Also Read: Taxable income vs gross income: Know the real difference

Conclusion

Understanding the taxation of bonds is essential for optimising your investment returns and effectively planning your tax liability. By strategically selecting between taxable, tax-free, and tax-saving bonds, investors can create a balanced portfolio that aligns with their tax planning needs and financial goals.

Axis Bank offers attractive investment options in the government bond segment that can help you navigate the intricacies of bond taxation while maximising returns. With RBI Floating Rate Bonds , you can begin your investment journey with as little as ₹1000. Plus, you get an extended maturity period, helping you create a stable avenue for long-term wealth creation.

Frequently Asked Questions

1. Are Indian bonds tax-free?

Only specific bonds designated as "tax-free bonds" issued by government entities offer complete exemption from taxes on interest income. Regular taxable bonds have interest that's fully taxable as per your income tax slab.

2. Is maturity of a bond taxable?

The taxation at bond maturity depends on the bond type. For regular taxable bonds, the principal amount returned at maturity isn't taxable as it represents your original investment. However, if you sell a bond before maturity at a price higher than your purchase price, the capital gains are taxable based on the holding period. For zero-coupon bonds, the difference between the discounted purchase price and face value received at maturity is treated as income and taxed accordingly. Sovereign Gold Bonds offer complete capital gains tax exemption if held until the full 8-year maturity period.

3. Is interest on bonds taxable?

Interest earned on bonds is generally taxable, with some exceptions. For instance, interest on regular taxable bonds is fully taxable and added to your total income. Tax-free bonds offer complete exemption from interest income, making them attractive for high-income individuals.

4. How to avoid TDS on bond interest?

To avoid Tax Deducted at Source (TDS) on bond interest, you can submit Form 15G (for individuals below 60 years) or Form 15H (for senior citizens) if your total income falls below the taxable limit. These forms declare that your income is below the taxable threshold, exempting you from TDS. Alternatively, you can provide your PAN details to the bond issuer, which reduces the TDS rate from 20% to 10%.

Disclaimer: This article is intended solely for informational purposes. The views expressed in this article are personal. Axis Bank and/or the author shall not be liable for any direct or indirect loss or liability incurred by the reader arising from reliance on the content herein. Readers are advised to consult a qualified financial advisor before making any financial decisions. Axis Bank does not endorse or guarantee the accuracy of any third-party content or links included in this article.