A bond's loss cannot cancel its interest

1Two boxes that never meet

In 2023 a reader worked out that government bonds were a better deal than a fixed deposit, and showed his arithmetic:

Current FD return is 7.1%. Post tax (30% slab) that becomes 4.9% OTOH in Gsec (3-5 year ones) return is around 7.x% but LTCG is 10% so post tax return is 6.x% [...] Question - is my understanding of points 2 and 3 above correct?

warkaree, TradingQnA, 30 August 2023

Another reader answered in one line:

The favourable tax treatment for bonds has been done away with. Now bonds are taxed at par with FDs, irrespective of your holding period.

Suyash.K, TradingQnA, 30 August 2023

The first reader had applied a capital gains rate to a coupon. That is the mistake this whole chapter is built to prevent, and it is not a careless one. A bond really does produce two different kinds of money, and they really are taxed differently. The trap is assuming you get to choose which rule applies, or that one can shelter the other.

Box A is interest. Every coupon the issuer pays you is income from other sources, taxed at your slab rate. Box B is capital gain or loss: what you paid for the bond against what you got back, whether you sold it or held it to maturity. Box B has its own rate and its own holding-period rules.

The boxes do not communicate. Say you buy a bond at ₹105, collect two years of coupons, and get ₹100 back at maturity. You pay tax on every rupee of coupon, and separately book a ₹5 capital loss. The loss does not reduce the interest income. It can only be set against other capital gains, and if you have none, it waits. A reader who expects the two to cancel will conclude he is being cheated. He is wrong about the cheating and right that it feels unfair.

2Which Act you are reading

In August 2026 a reader asked how a bond exchange-traded fund is taxed, and got a confident answer:

It's capital gain, but taxed at slab under section 50AA

BB789, TradingQnA, 23 August 2026

Section 50AA had ceased to exist five months earlier. The rule survives, but the number does not, and this is the single most confusing fact about Indian tax right now.

The Income-tax Act, 2025 repealed the Income-tax Act, 1961. Every section number in every article, forum post and note written before 2026 is now wrong. The rules mostly carried over unchanged; the addresses all moved. Worse, the two Acts overlap in time, and the Finance Act, 2026 contains two separate charging sections to handle it:

So a reader filing a return in the second half of 2026 is still living in the old Act, and will not find "section 92" anywhere in the form. This chapter uses the new numbering, because it is about the money you are earning now.

Here is the map for every provision a bondholder touches. Keep it; nothing else on the internet has caught up yet.

3The coupon, taxed like a deposit

Box A is short. The Act puts bond interest in the same bucket as almost every other kind of interest:

any income by way of interest on securities, if the income is not chargeable to income-tax under the head "Profits and gains of business or profession"

Income-tax Act, 2025, section 92(2)(e)

That is it. The coupon is added to your total income and taxed at whatever slab it lands in. There is no separate bond rate, no concession, and nothing resembling the treatment equity gets. Under the default regime the slabs run from nil below ₹4 lakh to 30 percent above ₹24 lakh, plus a 4 percent health and education cess on the tax.

Two things are worth knowing about the shelters, because neither covers you.

First, the only deduction the Act allows against interest on securities is a banker's fee for collecting it. Section 93(1)(a) permits "any reasonable sum paid as commission or remuneration to a banker or any other person for the purpose of realising such interest". Nothing else on the list reaches a bond.

Second, the small deduction that shelters interest for ordinary savers, section 153, covers interest on deposits with a bank, a co-operative bank or a post office. A bond is none of those. And under the default regime that deduction is switched off anyway.

A note on the figure this chapter uses for the top rate. 31.2 percent is 30 percent plus the 4 percent cess, and it applies to someone whose total income is above ₹24 lakh but not more than ₹50 lakh. Above that a surcharge starts, reaching an effective 39.0 percent in the default regime for income above ₹2 crore. Most commercial tax writing prints a single ladder ending at 37 percent surcharge; that ladder belongs to the old regime, which still exists but is now the exception.

4Ten thousand against fifty thousand

In March 2023 a bondholder posted a warning to the forum, and named the exact clause that was about to disappear:

As of now there was no TDS on interest credits if the bonds were held in demat form (however interest income is taxed at slab rates). this is set to change from FY 23-24. In this year's budget, they have done away with the existing clause (ix) of proviso to Sec. 193 [...] btw what's with the low Rs5000 p.a interest threshold for TDS on company FDs & corporate NCDs… I mean even for bank FD interest they had to hike it to Rs40000 p.a

sufimonks, TradingQnA, 22 March 2023

He was reading the Finance Bill correctly. Here is the clause that did it:

Figure 1

Before that change, a listed bond held in demat form paid its coupon gross, and you settled up in your return. Since 1 April 2023 the issuer deducts 10 percent at source. Nothing about your total tax bill changed. What changed is that the money arrives short, and you claim the difference back when you file.

The thresholds are where bonds come off worse than the deposit next door. All three numbers below have been current since 1 April 2025:

A 68-year-old gets ten times as much room before deduction starts on a deposit as she gets on a bond. The forum poster above complained about a ₹5,000 threshold against ₹40,000; both have since been raised, and the gap survived the raise.

Government bonds are the exception, and the exception is bigger than most people think. The Act's table of payments carrying no deduction covers "any security of the Central Government or a State Government", with three named carve-outs: the 8% Savings (Taxable) Bonds 2003, the 7.75% Savings (Taxable) Bonds 2018, and the Floating Rate Savings Bonds 2020. So a dated government bond, a state development loan and a treasury bill carry no TDS at all, at any size, and the ₹10,000 threshold is irrelevant to them.

Two practical points. TDS comes off the coupon the issuer pays, which is the full half-year or full-year amount, however long you held the bond. And the deduction is not a final tax. It shows up in your Form 26AS and annual information statement, and you claim credit for it against what you actually owe. If your income is below the taxable limit, Form 15G or 15H stops the deduction at source.

5The twelve-month cliff

In 2022 a reader holding a government bond asked a question that had a folk answer circulating at the time:

I hold 563GS2026-GS GoI dated bond and its age in my portfolio is 412 days. Does it fall under long-term holding now? [...] In some articles, it is mentioned that 3 years are considered as Long-term for GoI dated bonds, is that true?

scherukuri, TradingQnA, 30 May 2022

The three-year rule was a debt mutual fund rule, and it never applied to a listed bond. The Act draws the line on listing, not on who issued the paper:

"short-term capital asset" means a capital asset held by an assessee for not more than twenty-four months immediately preceding the date of its transfer; and where the capital asset is a security listed in a recognised stock exchange in India [...] the provisions of sub-clause (a) shall have effect, as if for the words "twenty-four months", the words "twelve months" had been substituted

Income-tax Act, 2025, section 2(101)

So a listed bond, whether a government security, a PSU bond or a company NCD, becomes long-term after twelve months. Sell earlier and the gain joins your income at your slab rate. Sell later and section 197 charges a flat 12.5 percent, with no indexation of any kind. That combination produces the sharpest edge in bond taxation:

Two extra months of patience leave a top-slab investor with 26 percent more of the same gain. That is worth knowing before you sell something at eleven months because the price looks good.

One more thing bonds do not get. Listed shares and equity funds enjoy a ₹1.25 lakh annual exemption before long-term gains are taxed. That exemption lives in section 198, which applies only to "an equity share in a company or a unit of an equity oriented fund or a unit of a business trust" on which securities transaction tax has been paid. Bonds are taxed under section 197, which has no equivalent. A one-rupee long-term gain on a bond is taxable.

6Unlisted bonds never turn long-term

The cliff above has an exception that swallows a whole category. Section 76 of the Act reads:

Irrespective of anything contained in section 2(101) or section 72, the gains on the transfer or redemption or maturity, of a capital asset as mentioned in sub-section (2) shall be treated as short-term capital gains [...] the capital asset shall be [...] a Market Linked Debenture; or an unlisted bond or an unlisted debenture which is transferred or redeemed or matures on or after the 23rd July, 2024.

Income-tax Act, 2025, section 76

Read the dates carefully, because this is the most commonly misreported rule in Indian bond writing. The trigger for an unlisted bond is when you exit, not when you bought. An unlisted NCD bought in 2019 and maturing in 2027 is caught, because it matures after 23 July 2024. There is no grandfathering for old holdings.

And note the three verbs: transfer, redemption, maturity. Holding an unlisted bond to the end does not escape the rule. Whatever the gain is, it is short-term, taxed at your slab, with no indexation ever.

Listing is a property of the instrument, not of how you bought it. Check the ISIN before you assume: plenty of bonds sold to individuals are unlisted, and the label changes the tax on the gain by up to 18 points.

7The interest you paid the seller

Chapter 4 explained that when you buy a bond between coupon dates you pay the seller for the interest that has piled up since the last payment. Then the issuer pays you the whole coupon, including the part that was really the seller's. What happens to that at tax time?

In July 2026 a reader put the question in exactly the right terms:

My parents have an interest income from bonds and no salary income. So, they have bought these bonds from apps, so they had paid accrued interest during purchase. Will I need to add that under Section 57 iii and take as exemption/deduction? Or show the accrued interest under Cost of acquisition and get capital gain/loss?

GuruV, TradingQnA, 11 July 2026

Four years earlier another reader had worked his way to the same fork, unaided, on a tax-free bond bought at a premium:

The capital loss needs to be evaluated on the clean price at the time of buying the bond which would be 1080-(82.3*0.75(roughly the amount of interest period that would have accrued on 5th Oct)) which makes it Rs. 1018, so assuming the clean price of acquisition can I claim Rs. 1800 as Capital Loss ?

Pratyush_Raj, TradingQnA, 5 October 2022

Here is the honest position: there is no settled authority on this for an individual investor. That is not a gap in this chapter's research. It is a gap in the law.

What does exist is a line of Supreme Court authority about banks. In Bank of Rajasthan Ltd. v. Commissioner of Income Tax, decided on 16 October 2024, the Court reviewed the earlier Vijaya Bank decision and drew this line:

on facts, if it is found that HTM Security is held as an investment, the benefit of broken period interest will not be available. The position will be otherwise if it is held as a trading asset.

Supreme Court of India, Bank of Rajasthan Ltd. v. CIT, 16 October 2024

Read across to a retail holder, who holds bonds as investments rather than as stock in trade, that points one way: the accrued interest you paid is part of what the bond cost you, not a deduction against the coupon. You would add it to your cost of acquisition, pay tax on the full coupon as interest, and recover the amount later as a smaller capital gain or a capital loss.

The difficulty is that the case was decided on bank facts, under a head of income that no longer exists. The tax department's circulars in the same line are all addressed to banks too. Under the current Act a retail bondholder's coupon sits in income from other sources, where the only permitted deduction is a banker's collection fee. So the competing reading, that only the interest accruing during your own holding is really your income, has an obvious fairness to it and no provision to hang on.

This chapter is not going to pick one for you. What it will say is that the first reading is the one that follows from the only Supreme Court authority in the area, that the question is genuinely open for an individual, and that this is the point in your bond tax to take to a chartered accountant rather than to a forum.

8Three instruments with their own rules

Tax-free bonds. Between 2012 and 2016 a handful of public sector issuers sold bonds whose interest is entirely exempt. Those bonds still trade, and the exemption still holds, through a piece of drafting worth seeing: the 2025 Act's Schedule II preserves it by pointing at the repealed 1961 Act, exempting "any income covered under section 10(15)(iii) or (15)(iv)(c) [...] of the Income-tax Act, 1961". So a reader hunting for the exemption inside the new Act's own numbering will not find it.

Exempt interest changes the comparison completely. To match a tax-free coupon, a taxable bond has to pay more. How much more depends on your tax rate: divide the tax-free coupon by one minus that rate.

That division is why these bonds trade at prices that look absurd, and why they are close to worthless to someone who pays no tax at all. One limit: the exemption covers the coupon only. Sell one at a profit and the gain is taxable in the ordinary way.

Capital gains bonds, now section 85. These are the bonds people buy after selling property. Section 85 exempts a long-term capital gain if you put it within six months into bonds redeemable after five years. The Act names two issuers, the National Highways Authority of India and the Rural Electrification Corporation, and caps the investment at ₹50 lakh across the year of the sale and the year after. Three things about these bonds are routinely got wrong.

Run the trade honestly. On a ₹50 lakh property gain the tax is 13 percent, or ₹6.5 lakh. Pay it and ₹43.5 lakh is free to invest anywhere. The alternative locks the whole ₹50 lakh for five years at 5.25 percent taxable, which is 3.61 percent after tax at the top slab. That is below inflation. So the exemption is worth ₹6.5 lakh up front, and the question is whether that beats five years of an illiquid return you cannot borrow against. It is arithmetic, not a foregone conclusion.

Sovereign Gold Bonds, changed on 1 April 2026. The old rule exempted the capital gain on redemption for any individual, which made buying SGBs on the exchange and holding them to maturity a well-known trade. The Finance Act, 2026 rewrote it:

Figure 2

Eleven words do the work: "if held by an individual from the date of original issue till maturity". The exemption now belongs to the original subscriber only. Buy an SGB on the exchange, hold it to redemption, and you have an ordinary capital gain. That is 12.5 percent plus cess if you held it more than twelve months, slab if less. In February 2026 a reader saw the change coming and asked what it meant for bonds he already held:

I bought sgb through secondary market which will get mature in 2030 and 2032. However in budget they told after 1st Apr 2026 it will not be tax exempt. [...] I am really confused. Pls clarify.

sandeep0604, TradingQnA, 11 February 2026

The answer is that he is a secondary buyer, so redemption from 1 April 2026 onward is taxable for him. The 2.5 percent coupon on an SGB was always taxable at slab and still is. One caution: RBI's own published answers on SGB taxation had not been updated to reflect any of this when this chapter was written, so do not use them as your source.

9What you need just to stand still

Chapter 2 promised an after-tax comparison against a bank deposit. Here it is, with current numbers.

Inflation in August 2026 was 4.82 percent. Take someone at the 31.2 percent rate. The return that leaves their purchasing power exactly unchanged is 4.82 divided by 0.688, which is 7.01 percent. Anything less is a real loss, however positive the number on the statement looks.

Against that, here is what bank deposits were actually paying, from RBI's own survey of scheduled commercial banks:

This is not an argument that bonds fix the problem. A bond's coupon is taxed at the same slab, so a 7 percent bond sits in the same hole as a 7 percent deposit. What the bond adds is the second box. A gain there is taxed at 12.5 percent after twelve months rather than at 31.2. The tax advantage of a bond over a deposit, where there is one, lives entirely in box B.

Four things to get right, and none of them needs a calculator:

The reader who opened this chapter was trying to compare a bond with a deposit and reached for the wrong rate. He was right about one thing though: the comparison is worth making, and after tax is the only way it means anything.