How Bonds Are Taxed in India (FY 2026-27): The Complete Guide
Bond returns arrive in two streams, interest and capital gains, and Indian tax law treats them very differently. Most investors, and most platform marketing, quote pre-tax yields and stop there. That’s how a 7.6% bond ends up beating an 8.2% one for someone in the 30% slab. Here’s the full picture for FY 2026-27.
The two streams, at a glance
| Return stream | Instrument | Tax treatment |
|---|---|---|
| Coupon / interest | All bonds (G-sec, SDL, corporate, FRSB) | Your slab rate + 4% cess |
| Capital gain | Listed bond, held > 12 months | LTCG at 12.5% + cess, no indexation |
| Capital gain | Listed bond, held ≤ 12 months | STCG at slab |
| Capital gain | Unlisted bond/NCD, any holding period | Always at slab (deemed short-term) |
| Discount at maturity | T-bills | At slab (always mature within a year) |
| Market-linked debentures | MLDs | Always at slab (Section 50AA) |
Two rows in that table do most of the damage to lazy assumptions.
The first is the 12.5% LTCG rate. For anyone in the 20% slab or above, converting return from “interest” into “listed long-term capital gain” nearly halves the tax on that portion.
The second is the unlisted trap. Since the Finance (No. 2) Act 2024, gains on unlisted bonds are taxed at slab no matter how long you hold them. An unlisted 10-year NCD gets no LTCG benefit at all. Check listing status before buying, because it moves the after-tax math a long way.
Interest income: slab, TDS, and the accrued-interest offset
Every coupon you receive counts as “income from other sources,” taxed at your marginal slab rate plus 4% health and education cess. Someone in the 30% slab keeps ₹68.80 of every ₹100 coupon.
TDS. Interest on listed bonds attracts 10% TDS under Section 193 once total interest from an issuer crosses ₹10,000 in a financial year. TDS isn’t an extra tax, since it adjusts against your final liability, but it is a cashflow drag. If your total income sits below the taxable limit, submit Form 121 (which replaced Forms 15G/15H from April 2026) to receive interest without deduction. Interest on government securities stays exempt from TDS for resident individuals.
The accrued-interest offset most people miss. When you buy a bond mid-coupon, you pay the seller accrued interest (see clean vs dirty price). A few months later you receive the full coupon, and the payer reports that full amount against your PAN. You’re allowed to deduct the accrued interest you paid from that coupon income, so you’re taxed only on what you economically earned. Keep the contract note and claim the netting in your return. On a large trade made just before a coupon date, it saves real money. The accrued interest calculator gives you the figure.
Capital gains: where the planning happens
Buy a listed bond at 96 and redeem at 100 two years later. That 4-point gain is LTCG at 12.5% plus cess, so 13% effective. Earn the same 4 points as coupon instead and it’s taxed at up to 31.2%. That difference is why discount bonds are structurally tax-efficient for high-slab investors: a bigger share of the return arrives as lightly taxed capital gain.
Premium bonds run the other way. Buy at 104, redeem at 100, and you’ve booked fully taxed fat coupons along the way plus a capital loss at maturity. You can set that loss against other capital gains, but the asymmetry still costs you. Two bonds with identical YTMs can differ by 40–60 bps post-tax on price composition alone, which is what the FD vs bond calculator makes visible.
No indexation. Since July 2024, debt instruments get no indexation benefit. The 12.5% flat rate replaced the old 20%-with-indexation regime.
Selling before maturity works the same way. Sale price minus purchase price (clean prices both times) is your capital gain, and the 12-month test decides LTCG or STCG for listed paper.
Special cases worth knowing
- T-bills always mature within 364 days, so the discount is taxed at slab. No TDS for residents. The T-bill calculator shows post-tax yields.
- Zero-coupon bonds (notified issues) deliver their entire return as a capital gain at maturity, which makes long-dated listed zeros among the most tax-efficient fixed income available to high-slab investors.
- Sovereign Gold Bonds, after the Budget 2026 change. Effective 1 April 2026, the capital-gains exemption at redemption applies only to original RBI-issuance subscribers who hold to redemption. SGBs bought on the secondary market no longer get exempt redemption gains and fall under regular LTCG rules (12.5% beyond 12 months). Full analysis in the SGB tax-change guide.
- RBI Floating Rate Savings Bonds pay interest taxed fully at slab, with TDS above ₹10,000. See the FRSB calculator.
- 54EC capital-gains bonds (REC/PFC/IRFC) are a different animal. They shelter capital gains from property sales up to ₹50 lakh if bought within 6 months, but pay a low coupon that is itself taxable at slab.
- Set-offs follow normal rules. Short-term losses set off against any capital gains, long-term losses only against LTCG. Unadjusted losses carry forward eight years, provided you file on time.
A worked example
₹10 lakh, 30% slab, 3-year horizon. Option A is a bank FD at 7.1%. Option B is a listed AAA NCD with a 7.0% coupon, bought at a clean price of 97.
- FD: every rupee of interest at 31.2%. Post-tax XIRR ≈ 4.9%.
- NCD: coupons at 31.2%, but the 3-point pull to par taxed at 13% as LTCG. Post-tax XIRR ≈ 5.3%, so the lower-yielding bond wins by about 40 bps a year.
Change the slab to 10% and the FD wins instead. Your slab, the price composition and the holding period decide it, which is why the calculator exists rather than a rule of thumb.
FAQ
Is bond interest taxable if I reinvest it? Yes. Taxation follows receipt, not what you do with the money afterwards.
Do I pay tax on accrued interest when I sell mid-coupon? The accrued interest you receive from the buyer is taxable as interest income in the year of sale.
Does the ₹1.25 lakh LTCG exemption apply to bonds? No. That exemption (Section 112A) covers listed equity shares and equity mutual funds only. Bond LTCG is taxed from the first rupee.
Where do I report all this in the ITR? Coupons under “Income from Other Sources,” capital gains in Schedule CG. Broker and RTA statements plus AIS give you the data trail, and it’s worth reconciling those against your contract notes.
Tax law changes every budget. This reflects FY 2026-27 rules as understood in July 2026. For anything material, confirm with a chartered accountant.
Educational content, not investment advice. Tax rules current for FY 2026-27 to the best of our knowledge, but verify with a professional before acting. See the full disclaimer.