How Bonds, Debentures, and Government Securities Are Taxed in India: Interest, Capital Gains, and Reporting (AY 2026-27)

With RBI Retail Direct, Zerodha, and dedicated bond platforms making fixed-income investing accessible, more Indians are adding bonds to their portfolios. But the tax treatment is not straightforward — and the rules changed significantly after Budget 2024. This guide covers how interest income and capital gains on bonds are taxed for AY 2026-27 (FY 2025-26), what TDS applies, and how to report everything in your ITR.

Types of Bonds and Their Tax Treatment at a Glance

Before diving into the details, here is a quick overview of how different bond types are taxed:

The rates and holding periods in this table reflect the Budget 2024 changes, applicable from July 23, 2024 onwards.

How Bond Interest Income Is Taxed

Interest earned on bonds and debentures is taxable under the head "Income from Other Sources" and is added to your total income, taxed at your applicable slab rate. This applies regardless of whether the bond is listed or unlisted, government or corporate.

Practical Example

Suppose you hold Rs 5,00,000 in corporate bonds paying 9% annual interest. You earn Rs 45,000 as interest during FY 2025-26. This Rs 45,000 is added to your salary or other income and taxed at whatever slab rate applies to your total income.

If your total taxable income (including the bond interest) is Rs 12,50,000, the bond interest falls in the 15% slab under the new tax regime.

The Exception: Tax-Free Bonds

Tax-free bonds issued by government-backed entities like NHAI, REC, PFC, HUDCO, and IRFC offer interest that is completely exempt from income tax under Section 10(15)(iv)(h). No new tax-free bonds have been issued in recent years, but they are actively traded in the secondary market on stock exchanges.

If you hold a 7.5% tax-free bond with a face value of Rs 10,00,000, the Rs 75,000 annual interest is entirely tax-free — you do not even need to report it as taxable income. For someone in the 30% tax bracket, this effective pre-tax yield is equivalent to roughly 10.7% from a taxable bond.

Capital Gains on Selling or Redeeming Bonds

The profit from selling a bond (or receiving more than your purchase price at maturity) is a capital gain. Tax treatment depends on whether the bond is listed or unlisted and how long you held it.

Listed Bonds and Debentures

If the bond or NCD is listed on a recognized stock exchange (BSE or NSE), the holding period threshold for long-term capital gains is 12 months.

• STCG (held ≤ 12 months): Taxed at your income tax slab rates
• LTCG (held > 12 months): Taxed at a flat 12.5% under Section 112, without indexation benefit

Unlisted Bonds and Debentures

For unlisted bonds, the holding period threshold is 24 months.

• STCG (held ≤ 24 months): Taxed at your income tax slab rates
• LTCG (held > 24 months): Taxed at a flat 12.5% under Section 112, without indexation benefit

What Changed in Budget 2024

Before Budget 2024, unlisted bonds enjoyed 20% LTCG with indexation, and listed bonds had 10% without indexation or 20% with indexation (whichever was lower). From July 23, 2024, the rules were simplified: 12.5% flat rate without indexation for all bonds. This benefits investors with short holding periods but hurts those who would have gained significantly from indexation on long-held bonds.

Example: Capital Gains on a Listed NCD

You purchased listed NCDs of a company at Rs 1,000 per unit in March 2025. In January 2026, you sell them at Rs 1,080. Holding period: 10 months (short-term).

• Purchase price: Rs 1,000
• Sale price: Rs 1,080
• STCG: Rs 80 per unit — taxed at your slab rate

If instead you sell in June 2026 (15 months later), the Rs 80 gain is LTCG, taxed at 12.5% = Rs 10 per unit.

Market-Linked Debentures: No LTCG Benefit

MLDs — instruments whose returns are linked to an underlying index rather than paying a fixed coupon — lost their tax advantage after the Finance Act 2023 introduced Section 50AA:

• Gains from MLDs are always treated as short-term capital gains, regardless of how long you hold them
• These gains are taxed at your income tax slab rate
• There is no LTCG benefit, no 12.5% rate, and no holding period threshold

If you invested Rs 10,00,000 in an MLD and received Rs 11,50,000 on maturity after 3 years, the entire Rs 1,50,000 gain is STCG, taxed at your slab rate.

Zero-Coupon Bonds: Capital Gains Only

Zero-coupon bonds pay no periodic interest — they are issued at a discount and redeemed at face value. The entire difference is a capital gain. The LTCG holding period is 12 months for listed and 24 months for unlisted zero-coupon bonds, taxed at 12.5%.

54EC Bonds: Exemption From Property Sale Capital Gains

54EC bonds are a tax-saving instrument that lets you claim an exemption from LTCG tax when you sell property. Invest your long-term capital gains from the sale of land or building into NHAI or REC bonds within 6 months, and the invested amount is exempt.

Key rules for AY 2026-27:

The interest on 54EC bonds is fully taxable — only the capital gain amount is exempt. Premature transfer before the 5-year lock-in reverses the exemption entirely. For a detailed walkthrough, see our guide on capital gains tax on property sale.

TDS on Bond Interest: Section 193

Tax is deducted at source on interest from bonds and debentures under Section 193 at 10%. However, there are important exceptions:

If your total income is below the taxable limit, submit Form 15G (or Form 15H for senior citizens) to avoid TDS. If TDS has already been deducted, claim a refund when filing your ITR. Always verify TDS amounts against your Form 26AS or AIS.

Government Securities: G-Secs, T-Bills, and SDLs

With RBI Retail Direct, individuals can now buy government securities directly. G-Secs and SDLs pay semi-annual interest taxable at slab rates, with no TDS for resident individuals. Capital gains on secondary market sales follow the standard 12-month holding period rule — 12.5% LTCG or slab-rate STCG.

T-Bills (91-day, 182-day, 364-day) are issued at a discount and redeemed at face value. Since they mature within a year, the gain is always STCG, taxed at your slab rate.

RBI Floating Rate Savings Bonds (FRSB 2020) pay interest linked to the NSC rate plus 35 basis points. Interest is taxable at slab rates, and TDS applies if annual interest exceeds Rs 10,000.

How to Report Bond Income in Your ITR

Bond income appears in two places in your ITR, depending on the type of income:

Interest Income

Report bond interest under Schedule OS (Other Sources) in your ITR. This applies to:

• Interest from corporate bonds and NCDs
• Interest from government securities
• Interest from RBI savings bonds

Tax-free bond interest is reported under Schedule EI (Exempt Income) — you still disclose it, but it is not added to your taxable income.

Capital Gains

Report capital gains from bond sales under Schedule CG (Capital Gains) in ITR-2 or ITR-3:

• STCG goes under "Short-term capital gains on assets other than those covered under Section 111A"
• LTCG goes under "Long-term capital gains under Section 112"

If you have capital gains from bonds, you cannot file ITR-1 — you must file at least ITR-2.

Before filing, cross-check your bond income against your Form 26AS (for TDS), AIS (for interest and transaction data reported by depositories), and your broker/platform tax statements. 49Tax's AI can pull your interest income and capital gains data from your AIS, flagging discrepancies before you file.

Common Mistakes to Avoid

1. Forgetting to report tax-free bond interest in exempt income. While the interest is not taxable, the Income Tax Department expects you to disclose it under exempt income. Omitting it can trigger an AIS mismatch.

2. Treating MLD gains as LTCG. Post-2023, all MLD gains are STCG regardless of holding period. Filing LTCG on MLDs will invite a notice.

3. Ignoring accrued interest on secondary market purchases. When you buy a bond between coupon dates, the accrued interest you pay the seller should be added to your cost — otherwise you overpay tax when you receive the full coupon.

4. Missing the 54EC deadline. You must invest within 6 months of selling the property. Even a one-day delay forfeits the entire exemption.

5. Not verifying TDS in Form 26AS. Bond issuers sometimes deduct TDS but fail to report it. Without 26AS confirmation, you will not get credit when filing.

Key Takeaway

Bond taxation comes down to two things: interest income (slab rates, under Other Sources) and capital gains (12.5% LTCG, slab-rate STCG). For AY 2026-27, remember that indexation is gone for bonds, MLDs have lost their LTCG advantage entirely, and government securities interest is exempt from TDS but not from income tax. Match every bond transaction against your AIS and Form 26AS before filing — even small mismatches on interest income can trigger automated notices.