When you invest in bonds, you lend money to a company or government and earn fixed interest, along with repayment of the principal at maturity. Corporate bonds are popular in India as they usually offer higher returns than fixed deposits while still providing relative safety. Before making an investment, it’s essential to understand how taxes will affect your returns. Interest income and capital gains are both taxable, and these directly impact your real return.
This guide explains how interest and gains from corporate bonds are taxed, followed by simple points on how to buy corporate bonds in India.
What are Corporate Bonds?
A corporate bond is a debt instrument issued by companies to raise money for projects or day-to-day needs. As an investor, you can earn in two ways:
- Through coupon or interest income, which is paid monthly, quarterly, or semi-annually.
- Through capital gains when you sell the bond at a higher price before maturity.
Corporate bonds can be listed or unlisted, secured or unsecured, non-convertible or convertible. Secured bonds have company assets as collateral, while unsecured bonds carry a higher risk.
How to Buy Corporate Bonds in India?
Buying corporate bonds is similar to entering a formal agreement with a company. Normally, investors buy these bonds through trusted platforms like Bondbazaar, which simplifies the process by offering a wide range of bond options. You can buy bonds during their initial issuance or from the secondary market, depending on availability and your investment goals.
Tax Implications on Corporate Bond Interest
Understanding how the interest earned from corporate bonds is taxed is essential. The interest you receive from corporate bonds is treated as income from other sources under Indian tax laws and is fully taxable according to your income slab. Unlike some other investment incomes, which might come with tax benefits or deductions, the interest on corporate bonds does not enjoy any exemption and should be reported as regular income.
Suppose a company issues a bond with a coupon rate promising periodic payments. In that case, every interest amount you receive must be added to your taxable income for that fiscal year. If the interest earned crosses a prescribed limit, the company deducts tax at source (TDS). This can later be adjusted against your total tax liability when filing returns.
Tax Treatment on Gains from Selling Corporate Bonds Before Maturity
Consider a scenario where you decide to sell your corporate bonds before their maturity date. The profit or loss you make from this sale is classified under capital gains.
The nature of capital gains depends on the holding period:
- Gains from selling bonds held for a shorter period fall under short-term capital gains.
- Gains from bonds held longer than this period are considered long-term capital gains.
Short-term capital gains are taxed at your applicable income tax rates, which aligns with the taxation on interest income. Long-term capital gains enjoy certain benefits depending on the bond type and the period held, often involving lower tax rates.
Tax on Redemption of Corporate Bonds
When a corporate bond reaches its maturity, the company repays the face value. This repayment is generally exempt from capital gains tax because you are receiving your initial investment back. However, any accrued interest or gains made by selling the bond before maturity will have tax implications as described.
Reporting and Documentation
Tax compliance is simplified when thorough documentation is maintained. All interest receipts, TDS certificates, and transaction statements should be carefully stored and maintained. Trusted platforms like Bondbazaar provide detailed reports that help in filing returns accurately and serve as proof in case of any tax scrutiny.
Tax on Corporate Bonds in India
| Aspect | Tax Treatment |
| Interest Income | Taxable as income from other sources |
| Tax Deducted at Source (TDS) | Deducted by issuer if interest crosses threshold |
| Short-term Capital Gains | Taxed at the applicable income tax slab |
| Long-term Capital Gains | Taxed at concessional rates if the holding period criteria are met |
| Redemption Amount | Principal repayment is generally exempt from tax |
| Documentation | Maintain interest statements, TDS certificates |
Conclusion
Investing in corporate bonds provides a structured way to earn fixed returns, but being clear about the tax implications helps optimize the net benefits. The interest earned is fully taxable as income, while profits from selling bonds can attract capital gains tax based on how long you hold them. Proper record-keeping and using reliable platforms for transactions can ease management and compliance. With a clear understanding of these tax factors, investors can effectively align their portfolio strategies with their financial goals.
Also Read : Maximizing Returns in the Indian Market with Bonds
