A ₹10 lakh investment in a bond that gives a 9% coupon gives ₹90,000 every year. A person who is in the 30% tax bracket keeps ₹61,920 after paying tax and cess. This means the return after tax is around 6.2%.
Interest income from bonds and most other fixed-income investments in India is added to the income. It is then taxed based on the investors tax bracket. Some products have tax deducted at source (TDS). Others do not. So the tax the investor ends up paying can be different from what was deducted
How bond interest is taxed
Coupon payments are treated as income from sources. They are taxed at the rate that applies to the investor. The the tax rate the more of each coupon payment goes to tax. At a 30% rate the tax on ₹90,000 of interest is ₹27,000. That goes up to ₹28,080 after adding the 4% health and education cess. Surcharge at income levels increases it further.
How TDS applies
TDS is the tax that the issuer deducts before the interest is paid to the investor. For investors the rate is usually 10% on interest from corporate bonds and debentures that are above a certain yearly amount. The threshold is mentioned in the TDS notices. For example a notice for the tax year 2026-27 sets the threshold at ₹10,000. If the investor does not provide a Permanent Account Number (PAN) the rate goes up to 20%.
Interest on government securities and treasury bills is taxed at the investors slab rate. Residents generally do not see TDS on this. However the 10% TDS is not the same as the tax owed if the investor is in a bracket. On the ₹90,000 example TDS of ₹9,000 leaves ₹19,080 to be paid through advance tax or at the time of filing.
If the total income is below the limit the investor can submit a declaration to the issuer to stop TDS. The form is called Form 121 under the Income-tax Act, 2025. This form replaced Forms 15G and 15H. The tax year 2026-27 is covered by this Act so the notices from issuers use section numbers. However the interest on bonds is still taxed at the slab rate.
How gains on bonds are taxed
| Bond type | Tax on gains |
|---|---|
| Listed bonds held than 12 months | Gains are taxed at 12.5% without indexation. |
| Listed bonds held 12 months or less | Gains are taxed at the slab rate. |
| Unlisted bonds and debentures | Gains are taxed at the slab rate for any holding period. |
Fixed-income investments
| Investment | Tax treatment |
|---|---|
| Bank fixed deposits | Interest is taxed at the slab rate with TDS above a yearly threshold. |
| Debt mutual funds | For units bought on or after 1 April 2023 gains are taxed at the slab rate for any holding period. |
| Sovereign gold bonds | Interest is taxed at the slab rate and gains on redemption at maturity are exempt. |
| Public Provident Fund (PPF) | Interest and the maturity amount are exempt from tax. |
| Tax-free bonds | Interest is exempt from tax while gains on a sale before maturity depend on listing and holding period. |
Where the tax shows up in filing
TDS appears in Form 26AS. The Annual Information Statement (AIS) against the PAN. The interest is reported under income from sources in the income tax return (ITR). Comparing the interest shown in these statements with the interest actually received helps catch mismatches before filing. Kuvera offers fixed deposits and direct mutual funds. The. Gains from each follow the rules mentioned above.
What investors should take from this
The return on a fixed-income investment is the after-tax yield. The tax slab rate is what mostly affects the difference between two products with the stated rate. TDS is a prepayment, not the tax. So the remaining tax for slabs is paid through advance tax or at the time of filing.
Frequently Asked Questions
1. Is interest from bonds in India?
Yes. Interest from bonds is added to total income and taxed at the slab rate. Interest from tax- bonds and the Public Provident Fund is exempt.
2. Is TDS on bond interest the tax?
No. TDS is a prepayment. The credit is claimed in the income tax return. Investors in slabs pay the balance through advance tax or at filing.
3. Is TDS deducted on government bond interest?
Residents generally see no TDS on interest from government securities and treasury bills. The interest is still taxable at the slab rate.
4. How are capital gains on listed bonds taxed?
Gains on listed bonds held than 12 months are taxed at 12.5% without indexation. Gains on bonds held 12 months or less are taxed at the slab rate.
5. Can TDS on bond interest be stopped?
If the total income is below the limit a declaration on Form 121 to the issuer can stop TDS. A missing PAN raises the TDS rate to 20%.
Mutual fund investments are subject, to market risks. Read all scheme related documents carefully. Tax rules mentioned here reflect rules and can change.
