- By SteadyAsset
- 25 Nov, 2025
Before thinking of any investment, the first thing that pops up in the investor’s mind is “tax.”. Is this investment tax-free, or if there is any tax, how much is applicable, and knowing it is there, how is this tax filed? In this article, let’s talk about the tax on bonds, and you’ll get a complete understanding of this subject.
Interest on bonds is taxed at the individual’s income slab rate; no tax bonds are excluded.
How are bonds taxed in India?
Interest on bonds is taxed according to the individual’s income tax slab. Long-term capital gains (LTCG) from listed bonds are taxed at 10% without indexing, while taxation of bonds is at 20% without indexing. Short-term capital gains (STCG) are taxed based on an individual’s income tax slab rate.
How are Interest and Capital Gains Taxed?
The interest received is considered income received, and it is taxed as per the slab rate of an individual. For instance, if the capital of Rs 1,00,000 is invested at an interest rate of 9%, the interest earned is Rs 9000 from this investment, and it is added to the gross total income. Assuming the income of the individual is Rs 10,00,000 and adding the Rs 9,000, the investor will fall under the Rs 10,00,000 and Rs 12,50,000 brackets, which is taxed at 15% as per the new regime, and for the old regime, it is 30%.
This may vary from person to person, depending on their income level. It’ll attract some surcharges and cess. If the income level is below the taxable bracket, interest is not taxed that way.
When it comes to capital gains, the short-term capital gains for both listed and unlisted bonds are taxed as per the applicable slab rates mentioned above, and the long-term capital gains of listed bonds are taxed at 10% without indexation and at 20% for unlisted bonds without indexation.
That’s pretty straightforward to comprehend; both interest and capital gains are taxed this way for any type of bond, but are all the bonds taxable? Not really.
Other Types of Bonds
Tax-free Bonds
It is popularly known for its tax-free benefits, which are commonly issued by governments and PSUs. As the name suggests, it is indeed tax-free but for interest income alone, which means the investor doesn’t need to pay any tax on the interest received from such bonds. The capital gains are still taxed as per the tax norms mentioned for LTCG and STCG in the above section.
Tax Saving Bonds
These bonds don’t work as similarly to tax-free bonds; they are tax-saving for a reason. They help you save tax on the long-term capital gains earned on capital assets you sell, like land or buildings. The investment can’t exceed 50 lakhs, and the gap between the sale and the investment in tax-saving bonds must be within six months. The investor receives a 100% exemption on LTCG held till maturity, but the interest is taxed as per the tax slab.
Zero Coupon Bonds
These bonds will not pay any interest but are bought at a discounted price and sold at face value. No interest means no tax on interest, but LTCG and STCG are applicable, respectively.
Market Linked Bonds
The bonds are linked to some index; if the interest rate is above the performance of the index only, then interest is paid and not otherwise. The interest is taxed as per the slab rate, and the capital gains are taxed accordingly as per LTCG and STCG.
Key Takeaways
- ✅ Bond interest income is taxed at the individual’s income tax slab rate.
- ✅ Listed bonds are taxed depending on the individual’s income bracket. Unlisted bonds are taxed at the individual’s income level if carried for less than 36 months.
- ✅ Tax-free bonds are those whose interest income is tax-free.
- ✅ Tax-saving bonds provide a deduction for LTCG from the sale of other assets, such as land or a home.
- ✅ Zero-coupon bonds mean that no interest is paid, and there is no interest tax.
- ✅ As per the Budget 2023, TDS of 10% is charged on interest income above Rs 5,000 for corporate bonds.
