Bonds, other than tax free bonds, are taxable as per the tax status of the bondholder. Most corporate bonds are taxable. However, there are some municipal and Government bonds with tax exemption where capital gains are not taxed, under Section 10, Income Tax Act of India, 1961.
- (i) Income Tax: Interest on bonds is taxable under the Income-Tax Act, 1961, based on the tax slab of the individual.
Sale consideration of the bond is referred to as capital gains. If listed bonds are held for more than 12 months and unlisted bonds for more than 36 months, the capital gain is considered long-term capital gain (LTCG) and taxed at 20% plus surcharge and cess. Otherwise, short-term capital gain (STCG) is taxed as per slab rate from 5% – 30%.
- (ii) Wealth Tax: Bonds are exempted from wealth tax under the Wealth- Tax Act, 1957.