Everything You Need To Know About Taxation On Bonds In India
Bonds are increasingly becoming a popular investment choice. These fixed-income products provide stability, lower risk than stocks, and higher returns than fixed deposits.
Like other investment avenues, it is crucial to consider the taxes on bond investments. Before investing in bonds, study all the information and pay close attention to decoding the tax effects.
Types Of Bonds And Taxation Impacts
1. Taxable Bonds: Investors can earn from bonds through two methods: interest and capital gains. The interest, regular income received from the bond during its term, is added to individuals’ gross total income and taxed according to the slab rate.
Capital gains occur when a bond is sold for more than its purchase price. For listed bonds, short-term capital gain (STCG) is taxed at applicable slab rates if a bond is redeemed before 12 months; otherwise, long-term capital gain (LTCG) is taxed at 10% without indexation.
For unlisted bonds, short-term capital gain (STCG) is taxed at applicable slab rates if a bond is redeemed before 36 months. If the holding period is more than 36 months, LTCG is taxed at 20% without indexation.
2. Tax-Free Bonds: Governments and PSUs issue these bonds to fund vital projects. They offer tax-free interest income. However, you need to pay capital gains tax from the sale of these bonds at a rate proportional to the time you held them.
3. Tax-Saving Bonds: There are two types of tax-saving bonds:
- Tax- Saving Bonds Under Section 80CCF
Tax-saving bonds under Section 80CCF are government-issued securities that provide investors with tax advantages. Those who purchase these bonds can deduct investments from their taxable income up to INR 20,000, offering a way to save money on taxes.
- Capital Gains Exemption Bonds Under Section 54EC
Capital gains exemption bonds under Section 54EC are government-issued instruments that allow individuals to save tax by investing capital gains from selling assets like stocks or property. Investors can invest in these bonds within six months of sale to avoid long-term capital gain tax (LTCG).
4. Zero-Coupon Bonds: Unlike conventional bonds, these bonds do not pay interest. Instead, investors purchase them at a discount and redeem them at face value upon maturity. Based on the duration of ownership, any profit made from selling zero-coupon bonds can be taxable.
Understanding Taxation On Interest Income And The TDS Requirements
Regardless of the type of bond you invest in—government, municipal, or corporate bonds-you will earn interest (except zero coupon bonds). Bond interest income is taxable, like interest earned on bank accounts, and is generally deducted at source (TDS).
Let us give you an example to help you understand:
Assume you purchase a corporate bond with an interest payment schedule of INR 8,000 annually. The bond issuer may deduct tax from the interest income before paying it to you.
Tax authorities apply different tax rates to interest income from bonds in India based on the types of bonds and investment terms. Let us assume that the TDS rate is 10%.
The financial institution will deduct 10%, or INR 800, as tax deducted at source from your interest income of INR 8,000.
In this example, after deducting TDS, the remaining interest revenue would be INR 7,200.
You must include this interest income of INR 8,000 in your income tax return for the applicable fiscal year. Like bank deposits, you must pay the outstanding tax if your total annual tax burden exceeds INR 800. If it is less than INR 800, you can get your money back for the extra TDS taken out.
Uncovering Capital Gain: Tax On Bond Investments Made In The Secondary Market
An investor may sell his bonds in the secondary market if he finds capital appreciation due to the difference between a bond's purchase and selling price. This difference determines their gain when selling the bond.
The capital gain tax due depends on the bond's holding period. The short-term capital gains tax on listed bonds applies at slab rates held for 12 months or less. A long-term capital gains tax of 10% on assets held for more than a year exists.
If you hold unlisted bonds for 36 months or less, you will pay short-term gains tax at the applicable slab rates. If you keep them for over 36 months, a long-term capital gains tax of 20% (non-indexing) is applicable.
Types Of Debt Investment With Tax Benefits
The table below highlights the type of debt investments and taxation on interest income.
Bond | Description | Interest Income And Taxation | Capital Gain |
54EC | Investors can avoid capital gains taxes on long-term asset sales by buying 54 EC bonds and investing in them within six months of the sale. As a result, the investor can keep more of their hard-earned money while paying less in taxes. | The 54 EC bonds have a fixed interest rate of 5%p.a. The interest income received from them is taxable at the regular rates. | 54 EC bonds have a 5-year lock-in term. They are exempt from capital gain tax if held till maturity. |
Tax-Free Bonds | Bonds issued by government agencies like HUDCO and IREDA are not subject to income tax up to a maximum capital of INR 20,000. | Interest on tax-free bonds is not taxable under Section 10 of the Income Tax Act of 1961. | Any profit made while selling bonds is subject to capital gains tax. |
| Sovereign Gold Bonds (SGBs) | The Gold Monetisation Scheme introduced Sovereign Gold Bonds in November 2015, with values of 1 gram of gold or multiples thereof. As a result, people can invest in gold. | The proposed interest rate on SGBs is 2.5% per annum. It is taxable under the income category from other sources at the investor’s applicable slab rates. | According to Section 47 (VIIC) of the Income Tax Act, SGBs are tax-exempted if held until their 8-year maturity. |
Conclusion
Bonds provide predictable, fixed-income investment opportunities at low risk. To make sound financial plans, you must pay close attention to details regarding bond taxation. Understanding the basics of bond taxes can improve your investing strategy, and talking to a financial advisor can ease uncertainty. To stay updated with investment and taxation content, follow Grip Invest.
Frequently Asked Questions on Taxation On Bonds In India
1. Is TDS applicable on bonds?
TDS (Tax Deducted at Source) applies on bonds. It is typically charged at 10%.
2. How much TDS is deducted from bonds?
The rate of TDS deducted on bonds can vary, but the standard rate is typically around 10%.
3. How do I claim TDS on bond interest?
To claim TDS on bond interest, you need Form 16A or a TDS certificate from the bond issuer (deductor). Also, you need to ensure that the TDS amount is shown in your Form 26AS for the relevant year.
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