How is bond interest taxed?

A bond can produce 2 kinds of taxable income: interest from coupons, and a capital gain or loss when you sell it or it is redeemed at a price different from your cost. From 1st Apr 2026 these provisions sit in the Income-tax Act 2025; the TDS provision on interest from securities moved from section 193 to section 393(1) at the same rate (TDSMAN).

How is each part taxed?

Income	Tax treatment
Coupon interest on corporate bonds, NCDs, G-secs and SDLs	Slab rate
T-bill return (gap between allotment price and ₹100 at maturity)	Short-term capital gain at slab (Zerodha)
Listed bond sold after more than 12 months	12.5% long-term capital gain, no indexation (Business Standard)
Listed bond sold within 12 months	Short-term capital gain at slab
Unlisted bond or debenture, any holding period	Taxed as short-term at slab under old section 50AA (TaxTMI)
Market-linked debentures	Short-term capital gain at slab (Outlook Money)
54EC capital gain bond interest	Slab rate, no TDS (ICICI Direct)
Tax-free bond interest	Exempt; a gain or loss on selling the bond is still taxable (TradingQnA)

What does that look like in rupees?

Take a listed bond with ₹1 lakh face value and a 9% annual coupon, held by someone in the 30% slab. The ₹9,000 coupon is taxed at 30%, so ₹2,700 is due, of which the issuer has already deducted ₹900 as TDS. If you bought it at ₹98,000 and sell it 18 months later at ₹1,00,000, the ₹2,000 gain is long-term and taxed at 12.5%, which is ₹250. Sold after 10 months, the same gain is taxed at 30%, which is ₹600. Surcharge and cess are left out of these figures.

Is TDS deducted?

Yes, on most corporate bonds. Interest on listed debentures has carried 10% TDS since 1st Apr 2023 (20% without PAN), after the Finance Act 2023 removed the earlier exemption, including for bonds issued before that date (EY, Vinod Kothari). TDS is credited against your final tax, not charged on top. Thresholds and Form 121 are covered in TDS on bond interest.

What about the accrued interest I paid when buying?

When you buy between coupon dates you pay the seller the interest accrued since the last coupon, either inside the price (exchange order book, dirty price) or as a separate line (RFQ). Your next coupon then includes interest you paid for. A Quicko reply on TradingQnA says the accrued interest paid can be deducted under section 57 against that bond's interest (TradingQnA). This is reported practice that we have not confirmed in the Act. See reporting accrued interest in the ITR.

Which common beliefs are out of date?

• Listed NCDs have no TDS: outdated since 1st Apr 2023.
• Unlisted bonds turn long-term after 2 or 3 years: since 23rd Jul 2024 unlisted bonds and debentures are taxed at slab whatever the holding period.
• Tax-free bonds are tax-free on sale: only the interest is exempt.
• Every SGB is tax-free at maturity: as reported after Budget 2026, only original subscribers who hold to maturity qualify. See SGB tax.