Looking to invest in bonds? Know the tax rules when buying in the primary market and holding to maturity

There are several types of bonds available in India and investors seek to invest in these bonds with the aim of obtaining both interest and principal appreciation.

Since different bonds are taxed differently depending on their nature and how long they are held, you should be aware of the tax benefits and implications before making an investment decision.

Unless expressly stated, bond interest is generally taxable. Otherwise, the name of a bond would contain the terms – non-taxable and capital gain, etc., where applicable.

So what will be the tax rules when a bond is purchased in the primary market (when issued) and held to maturity?

Dr. Suresh Surana, Founder of RSM India, explains the tax rules for different types of bonds in such a case:

The taxation of bonds depends on whether the bond is listed or unlisted as well as the holding period of these bonds.

In the case of listed bonds, capital gains 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 considered short term. Long-term capital gains from bonds would be taxed at the rate of 20% in accordance with Section 112 of the Income Tax Act 1961 (hereinafter referred to as “the Computers Act”) without indexation, while short-term capital gains from bonds would be taxed at marginal tax rates applicable to the investor. However, in the case of unlisted bonds, although the tax rates would apply as indicated above, the threshold limit for the determination of long-term capital gains would be 36 months instead of 12 months , that is, gains from these unlisted bonds would be considered 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 can be used in the event of long-term capital gains from bonds, except in the case of capital-indexed bonds and sovereign gold bonds.

Since the Bonds are purchased on the Primary Market, it can be assumed that these bonds are listed bonds.

A. Period for deciding whether the capital gain is short-term or long-term – 12 months. In the event that these are not listed, the threshold period of 36 months would apply.

B. Current tax rates applicable to each situation – Long-term capital gains will be taxed at 20% and short-term capital gains will be subject to marginal slab rates.

However, it should be noted that in the case of gold sovereign bonds, no capital gain would arise on these bonds if they are held to maturity in accordance with article 47 (viic) of the IT law.

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