Bond taxation in India is one of those topics that makes people's eyes glaze over. I get it. But here is the thing: if you do not understand the tax rules, you might think you are earning 8% when you are really pocketing 5.5% after tax. That is a big difference. So let me break down exactly what you pay on bonds in 2026. No jargon, no fluff. Just the rules that matter.
Listed Bonds: G-Secs and Listed Corporate Bonds
Listed bonds are the ones traded on exchanges. Government securities (G-Secs) and listed corporate bonds fall in this bucket. The rules are straightforward.
If you hold for 12 months or less, any gain is short-term capital gains (STCG). That gets taxed at your income tax slab rate. So if you are in the 30% bracket, you pay 30% plus surcharge and cess on your gains. Ouch.
If you hold for more than 12 months, it becomes long-term capital gains (LTCG). Here is the important part: you pay a flat 12.5% on LTCG from listed bonds. And no, you do not get indexation anymore. The government removed that benefit. You cannot adjust for inflation. Your cost of acquisition stays what you paid, period. This change hurt a lot of bond investors, but it is what it is.
On the interest side, there is TDS to think about. Under Section 193, if your annual interest from a bond exceeds Rs 10,000, the payer deducts 10% as TDS. One exception: G-Secs bought through RBI Retail Direct generally do not attract TDS for resident individuals. That is a small win if you are building a bond portfolio directly.
Unlisted Bonds: The Brutal Part
Now we get to the ugly stuff. Unlisted bonds. These are bonds that are not traded on any exchange. You buy them from private placements, or from your relationship manager, or from some fintech app that promises you 12% returns.
Under Section 50AA, ALL gains from unlisted bonds are treated as short-term capital gains. It does not matter if you held for 10 years. It does not matter if you held for 10 days. Every single rupee of gain is STCG. And STCG is taxed at your slab rate. So if you are in the 30% bracket, you pay 30% plus surcharge and cess. That can go up to 40% or more.
This makes unlisted bonds very tax-inefficient for anyone in higher tax brackets. You might get 11% or 12% yield, but after tax you could be left with 5% or 6%. My advice: stick to listed bonds. The tax math alone is enough reason to avoid unlisted bonds unless you have a very specific reason and a good accountant.
Sovereign Gold Bonds: Tax Changes in Budget 2026
SGBs got a shake-up in the 2026 budget. If you are an original subscriber and you hold till maturity, you are still good. Capital gains are tax-free. That has not changed.
But if you bought SGBs from the secondary market (on the exchange, after the initial issuance), the rules are different now. Hold for 24 months or more and you pay LTCG at 12.5%. Hold for less and you pay STCG at your slab rate. So secondary market buyers are no longer getting the same tax-free ride at maturity.
The 2.5% annual interest on SGBs is always taxable at your slab rate. That part never changed.
I have written a full post on SGB tax changes in Budget 2026 if you want the complete picture.
54EC Capital Gain Bonds
These are for people who sold property (land or building) and want to defer the capital gains tax. You invest the proceeds in 54EC bonds within 6 months of the sale. The tax exemption is available only if you follow the rules strictly.
54EC bonds are issued by REC, PFC, IRFC, and HUDCO. All are AAA-rated and government-backed. So credit risk is low.
Here is the catch: there is a strict 5-year lock-in. You cannot sell. You cannot transfer. You cannot pledge. You cannot redeem early. Period. If you break the lock-in for any reason, the original tax exemption is reversed retroactively. You will owe the tax you thought you had escaped, plus interest. So only invest if you are 100% sure you will not need that money for 5 years.
Maximum investment is Rs 50 lakh per financial year. If you sold property for a crore and your capital gain was 80 lakh, you can only exempt 50 lakh of it in that year. Plan accordingly.
RBI Floating Rate Savings Bonds
These are the 7-year bonds that pay interest linked to the NSC rate plus 0.35%. As of early 2026, the yield is around 8.05%. Interest is paid semi-annually on January 1 and July 1.
Like 54EC bonds, these have a strict lock-in. 7 years. You cannot trade them. You cannot pledge them. You cannot withdraw early unless you are a senior citizen and meet some narrow exceptions. So only put money here if you are okay locking it up.
Interest is taxable at your slab rate. There is no TDS if you hold in demat form through RBI Retail Direct, but you still need to pay the tax when you file your return.
The Bottom Line
Bond taxation in India is not simple, but it is predictable once you know the rules. Listed bonds get the 12.5% LTCG treatment after 12 months. Unlisted bonds get hammered at slab rate no matter what. SGBs have different rules for original vs secondary buyers. 54EC and FRSB have lock-ins that you cannot break without serious tax consequences.
Before you invest, read up on the Indian bond market in 2026 and the difference between government and corporate bonds. Then figure out how to actually buy bonds in India. And if you are still wondering whether bonds fit your profile, check out my take on bond risks and who should invest.
Tax is not exciting. But paying less of it? That never gets old.