How Indian Corporate Bonds Are Taxed for Retail Investors

A bond offering 9% interest may look attractive, but I would not treat the full 9% as money available to spend. Tax can reduce what I keep. Before investing, I want to understand both the income a bond offers and the tax payable on it.

The taxation of Indian corporate bonds becomes easier to follow when I separate two things: the interest I receive and the profit I may earn by selling a bond. These are taxed differently.

Tax on the interest I receive

When I buy a corporate bond, I lend money to a company. The company pays interest according to the bond’s terms. This interest is also called the coupon.

For a resident individual holding taxable bonds as investments, interest is generally added to income under “Income from Other Sources”. The tax payable depends on the investor’s income tax slab. Monthly, quarterly or annual payments do not change this basic treatment.

Suppose I buy a bond at its face value of ₹1 lakh, with an annual coupon of 9%. It pays ₹9,000 in interest over a year. If all this interest falls in my 30% tax slab, the tax is ₹2,700 before cess and any surcharge. I retain ₹6,300 before those additional charges.

Someone in a lower tax slab could keep more from the same bond.

What a TDS deduction means

The interest credited to my bank account may be lower because the company has deducted tax at source, known as TDS.

For taxable corporate bond interest paid to residents, TDS generally applies at 10% when interest from the payer exceeds ₹10,000 during the tax year, subject to applicable exceptions and PAN requirements.

I treat TDS as tax already paid on my behalf. It does not always cover my full tax bill. If my final liability is higher, I pay the difference. If too much has been deducted, I can claim an eligible refund through my tax return.

Even when no TDS is deducted, the interest may still be taxable.

Tax when I sell a bond

A separate tax calculation arises if I sell a bond for more than I paid. This profit is called a capital gain.

For ordinary listed corporate bonds, gains on a sale within 12 months are generally taxed at the applicable slab rate. After holding for more than 12 months, long-term capital gains are generally taxed at 12.5%, without an inflation adjustment called indexation. Cess and any applicable surcharge are extra.

For example, if I buy at ₹98,000 and sell at ₹1 lakh, the gain is ₹2,000 before allowable costs, assuming interest is accounted for separately.

Unlisted bonds and market-linked debentures follow special rules. Their capital gains are generally treated as short-term, regardless of how long they are held.

The records I would keep

I would save purchase and sale statements, interest records and TDS details. When reviewing corporate bond settlement, I would also check whether the payment includes accrued interest, meaning interest built up since the previous coupon payment.

At maturity, getting back my original investment is not itself interest income. However, a difference between my purchase price and the redemption amount may create a taxable gain.

Before choosing a bond, I would work out the expected income after tax alongside the issuer’s repayment ability. That gives me a clearer idea of what the investment could contribute to my finances.