Money Clarity

How bond interest and gains are taxed in India

The yield on a bond is quoted before tax, and the TDS deducted from its interest looks like the tax. It is not. TDS on bond interest is 10%; the tax is your slab rate. At a 30% slab, two-thirds of the tax on your bond interest is still owed when you file your return, and investors who treat TDS as the end of it find out at the worst moment.

The second thing most people miss is that a bond can be taxed twice in different ways: its interest at your slab rate, and any gain when you sell it at a rate that depends on whether it is listed and how long you held it.

This page works through both on one investor's bond, so you can redo it on yours.

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Last reviewed 2026-11-01

Interest: TDS first, then your slab

The technique

TDS is a down payment, not the bill

TDS is collected at a flat rate whatever your income. Your actual tax on bond interest is your slab rate. The difference is settled when you file: a refund if your slab is lower than 10%, more tax if it is higher.

Bond interest is added to your income and taxed at your slab rate. Separately, the issuer deducts TDS at 10% once the interest it pays you in a year crosses ₹10,000, the threshold for interest on securities set in the 2025-26 Budget.

Take Kavya, who holds a ₹5 lakh listed bond paying 9% a year: ₹45,000 of interest. The issuer deducts ₹4,500. At a 30% slab her tax on that interest is ₹13,500, or ₹14,040 with the 4% cess, so about ₹9,500 more is due when she files.

Kavya's ₹5 lakh bond at 9%, 30% slab

Interest for the year: ₹45,000
TDS deducted by the issuer, 10%: ₹4,500
Tax at 30% slab, plus 4% cess: ₹14,040
Still owed at filing: ₹9,540
Interest kept after tax: ₹30,960

Illustrative coupon. Her post-tax return is 6.19% on a 9% bond.

Compare bonds with FDs after tax, not before. Both are taxed at your slab, so the gap shrinks by your slab rate
If your income is below the taxable limit, you can claim the TDS back when you file, or give the issuer a self-declaration in advance so it is not deducted

Selling before maturity: the gain is taxed too

If you sell a bond before it matures for more than you paid, the profit is a capital gain. The 2024-25 Budget set the rules that apply now: a listed bond held for more than a year is a long-term asset and its gain is taxed at 12.5%. Held for a year or less, the gain is taxed at your slab rate. Unlisted bonds and debentures are taxed at your slab rate whatever the holding period.

Say Kavya sells her bond for ₹6,000 more than she paid. After 14 months, the tax on the gain is ₹750 at 12.5%. Had she sold after 10 months, it would be ₹1,800 at her 30% slab.

Held for	Listed bond	Unlisted bond
Up to 12 months	Slab rate	Slab rate
More than 12 months	12.5%	Slab rate
Kavya's ₹6,000 gain, sold after 14 months	₹750	₹1,800 at 30%

Plus cess. Interest is always taxed at slab; this table is only for the gain on sale.

If you are close to the 12-month mark on a listed bond with a gain, waiting a few weeks can cut the tax on the gain by more than half at a 30% slab

Gold bonds and tax-free bonds are different

Two kinds of bond have their own rules. Sovereign gold bonds pay interest that is taxed at your slab, while the gain at maturity is exempt for original subscribers who hold them to the end; new issues stopped after 2023-24. Tax-free bonds, issued by some public sector companies years ago, pay interest that is exempt from tax but trade only on the exchange now.

If you hold either, treat it separately from an ordinary corporate bond when you file.

Tax-free bond interest is exempt, but a gain from selling the bond is still a capital gain

Comparing a bond with an FD after tax

Because bond and FD interest are both taxed at your slab, the tax does not change which pays more, but it does shrink the gap. At a 30% slab with cess, an illustrative 9% bond keeps 6.19% and an illustrative 7% FD keeps 4.82%. The 2-point gap before tax becomes 1.38 points after.

That 1.38 points is what the bond pays you for its risks: no deposit insurance, the issuer's credit and the chance of having to sell below par. Judge the bond on that number, not on the 2 points on the offer page.

Before and after tax, 30% slab with cess

Bond at 9%, kept after tax: 6.19%
FD at 7%, kept after tax: 4.82%
Real gap you are paid for the risk: 1.38 points

Illustrative rates. Tax at 30% plus 4% cess, i.e. 31.2% of interest.

The lower your slab, the more of the bond's extra yield you keep. At a 5% slab almost all of it survives tax

Before you file: a checklist

A few minutes with these saves a notice later.

Add up the year's bond interest from your bank credits, not from what you remember buying
Match the TDS on each bond against your Form 26AS or Annual Information Statement
Report interest at your slab and pay the difference over TDS before filing
For any bond sold, note whether it was listed and how long you held it, and report the gain at the right rate

Common questions

Is bond interest taxable in India?

Yes. Interest from corporate and bank bonds is added to your income and taxed at your slab rate. The issuer deducts TDS at 10% once the interest it pays you in a year crosses ₹10,000, but that is a prepayment: at a 30% slab, ₹45,000 of interest attracts ₹14,040 of tax with cess, so ₹9,540 more is due at filing.

How are capital gains on bonds taxed?

A listed bond held for more than 12 months is long-term and its gain is taxed at 12.5%; held for 12 months or less, the gain is taxed at your slab rate. Unlisted bonds and debentures are taxed at your slab rate whatever the holding period, under the rules set in the 2024-25 Budget.

What is the TDS threshold on bond interest?

₹10,000 a year per issuer for interest on securities, from the 2025-26 Budget. Below that, no TDS is deducted, but the interest is still taxable at your slab rate.

Are bonds better than FDs after tax?

Both are taxed at your slab, so tax shrinks the gap but rarely reverses it. At a 30% slab with cess, a 9% bond keeps 6.19% and a 7% FD keeps 4.82%. Whether 1.38 points is enough depends on the bond's rating and what you give up, such as deposit insurance.

Bond interest is taxed at your slab; the 10% TDS taken once interest crosses ₹10,000 a year is only a down payment. On Kavya's ₹45,000 of interest at a 30% slab, ₹9,540 was still owed at filing. Gains on sale are taxed at 12.5% for listed bonds held over a year and at your slab otherwise. Compare a bond with an FD on what you keep after tax.

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