Understand the taxation in India 2025. Learn interest, capital gains, tax-free bonds & smart strategies to boost your after-tax returns.
You might have already tasted the safety and predictability of bonds. But taxes can quietly erode your yield. What if you knew exactly how bonds are taxed in India in 2025 and how to boost your after-tax returns legally?
Let’s demystify bond taxation and arm you with strategies to keep more in your pocket.
1. Basics: Bond taxation in India
a) Tax on bond interest
Any interest you receive from bonds (coupon) gets added to your income and taxed according to your income tax slab.
For corporate bonds, there is also a TDS (Tax Deducted at Source) of 10%, unless you submit Form 15G or Form 15H (if eligible).
b) Capital gains tax on bonds
How gains are taxed depends on whether the bond is listed or unlisted, and how long you held it.
- Listed bonds: If held for more than 12 months, gains are long-term capital gains (LTCG) and taxed at 10% (without indexation). If held for less than a year, profits are considered short-term and taxed at your applicable tax rate.
- Unlisted bonds: If held more than 36 months, gains are taxed at 20% (without indexation). Otherwise, short-term gains apply.
Indexation removed
From 23 July 2024 onward, Income Tax India has removed the indexation benefit for long-term capital gains from bonds (and other assets). Now, LTCG on bonds (for transfers made after July 23, 2024) is taxed at a flat rate of 12.5% without indexation.
2. Some special bond types & their tax quirks
- Tax-free bonds
“Tax-free bonds are considered safe investments that give investors a steady fixed interest every year. Additionally, investors can save money because the interest they earn is tax-free. The principal amount is returned upon maturity.
Government / PSU entities issue these. The interest you earn is fully exempt under Section 10(15).
However, if you sell them before maturity, capital gains may be subject to tax under the holding period rules.
- Tax-saving / Capital gain bonds (e.g., under Section 54EC)
If you have long-term capital gains (LTCG), you can invest up to ₹50 lakh in specified 54EC bonds within six months to claim exemption. However, note: interest on those bonds is taxable at the applicable slab rate.
- Zero-coupon bonds
They don’t pay periodic interest. Instead, you buy at a discount and receive face value at maturity. Taxation occurs on capital gains, according to holding period rules.
- Sovereign Gold Bonds (SGBs)
Although technically a hybrid, SGBs receive special treatment: interest is taxed according to your slab, but capital gains at maturity are tax-exempt.
3. Comparing: Debt mutual funds vs bonds taxation
- Holding period for LTCG
Bonds need just 12 months to be eligible for LTCG.
Debt mutual funds become eligible for long-term capital gains tax only after 36 months of holding. - Tax rates & indexation
Debt mutual funds (if held for over 36 months) enjoy indexation-adjusted gains taxed at 20%. However, for funds bought after April 1, 2023, the indexation benefit is being curbed.
In contrast, with bonds, indexation is removed (post-July 2024), and LTCG on bonds is taxed at a flat rate of 12.5%.
Therefore, for shorter horizons or when you prefer direct control, bonds may offer more favourable taxation.
4. Data-Driven Example
Let’s run a simple scenario:
- You invest ₹5,00,000 in a listed corporate bond at 8% coupon rate for 3 years.
- Annual interest = ₹40,000 → total coupon = ₹1,20,000 over 3 years
- Suppose after 3 years, the bond’s redemption or sale gives you ₹5,60,000 → capital gain = ₹60,000
Tax side:
- Interest is added to your income and taxed according to the applicable slab.
- LTCG on bond (held >12 months) taxed at 10% (without indexation). So tax = ₹6,000.
- Total return before tax = ₹1,20,000 + ₹60,000 = ₹1,80,000
- After interest tax + LTCG, your net return might shrink by 20-30% depending on the slab.
Now, if you held a tax-free bond offering 7%, for ₹5,00,000:
- Annual interest = ₹35,000
- Over 3 years = ₹1,05,000
- Since interest is exempt, you pay no tax on it.
- If sold, gains may attract tax, but your after-tax yield is significantly higher than that of a taxable bond.
This shows how tax treatment can shift effective yields by a few percentage points.
5. Tips & tax-efficient strategies
- Pick tax-free bonds when you fall in higher tax slabs.
If you’re in the 30% tax bracket, a slightly lower coupon but tax-exempt interest may be preferable to a higher coupon with significant tax drag. - Hold bonds beyond thresholds.
For listed bonds, hold for over 12 months. For unlisted, refer to the 36-month rule (although the law has removed indexation, the LTCG slab may still change). - Use Section 54EC when you sell property.
Reinvest gains in 54EC bonds to shelter capital gains tax. Just remember interest on them is taxable. - Submit 15G / 15H
If you are below the taxable limit, submitting these to the issuer saves TDS on the coupon. - Mix bonds & debt funds smartly.
Use bonds for stability and predictable income. Use debt mutual funds for exposure when you can benefit from indexation (depending on purchase date). - Stay updated on tax law changes.
The 2024 amendments removed indexation for LTCG and set a rate of 12.5% for many assets. Laws evolve; adjust your strategy accordingly.
Conclusion: Why choose Equentis Investech?
At Equentis Investech, we don’t just show you bonds and let you guess tax outcomes. We guide you in picking tax-efficient bonds, structuring investments, and timing exits smartly. We focus on after-tax returns, not just face yields. Plus, we stay fully updated on tax law changes, so you don’t worry about surprises.
Let us help you invest in bonds with clarity and keep more of what you earn.
