There are several types of bonds available in India and investors look to invest in such bonds with an intent to have both interest and capital appreciation.
As different bonds are taxed differently depending on their nature and holding period, you need to know the benefits and tax implications before taking an investment decision.
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Unless mentioned specifically, bond interests are generally taxable. Otherwise, the name of a bond would contain the terms – tax-free and capital gain, etc, if applicable.
So, what will be the tax rules when a bond is bought from the primary market (during its issue) and held till maturity?
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Dr. Suresh Surana, Founder, RSM India explains the tax rules for different types of bonds in such a case:
Taxation of Bonds depends upon whether the bond is listed or unlisted as well as the period of holding of such bonds.
In case of listed bonds, the capital gains derived from such bonds would be long term in nature provided the bonds are held for a period of more than 12 months, otherwise such gains would be regarded as short term. Long term capital gains from bonds would be taxed at a rate of 20 per cent u/s 112 of the Income Tax Act, 1961 (hereinafter referred to as ‘the IT Act’) without indexation whereas short term capital gains from bonds would be taxed as per the marginal tax rates applicable to the investor. However, in case of unlisted bonds, though the tax rates would be applicable as aforementioned, the threshold limit for determination of long term capital gains would be 36 months instead of 12 months i.e. gains arising from such unlisted bonds would be considered as long term only when the bonds are held for a period of more than 36 months, otherwise such gains would be treated as short term.
It is pertinent to note that no indexation benefit could be availed in case of long term capital gains derived from bonds except in case of Capital Indexation Bonds and Sovereign Gold Bonds.
Since the Bonds are purchased from Primary Market, it could be assumed that such bonds are listed bonds.
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A. Period to decide whether capital gain is short term or long term – 12 months. In case the same are unlisted, the threshold period of 36 months would apply.
B. Current tax rates applicable for each situation – Long-term capital gain arising will be taxed at 20 per cent, and Short term capital gains would be subjected to the marginal slab rates.
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However, it is to be noted that in case of Sovereign Gold Bonds, no capital gains would arise on such bonds in case they are held till maturity u/s 47(viic) of the IT Act.
