Various Bond Types & Decoding the Tax Effects

Bonds are debt instruments that represent the debt owned by the government and corporations to the investor. The entities raise funds for their various requirements like infrastructure projects, expansion, etc. Investors receive a fixed return known as a coupon in exchange for investing in companies and are repaid the principal amount at maturity.

Before making an investment decision, investors should always take into consideration the return generated from the asset. But to calculate a real return from an investment, it is very crucial to know the tax implications of the same.

While investing in bonds there are two types of income generated by investing in bonds: interest income, which is paid at predetermined intervals such as monthly, quarterly, semi-annually, and so on and the other is capital gain/ loss at the time of sale/ redemption of bonds.

There are different types of bonds like Government Securities, Corporate Bonds, Taxfree bonds, 54EC Bonds, Gold Bonds, etc. and each has a unique structure. The two major components of an investor’s return that are taxable are Interest income and capital gains. In this blog, let us try and understand the tax implications of investing in various types of Bonds.

Understanding Taxation on Interest Income and the TDS Requirements

Bonds represent a loan agreement between the lender (investor) and the borrower (government & Corporates) where the government & corporates pay regular interest on the borrowed money. The interest payments also known as coupon rates are predefined and specified in the offer document. Thus, when an investor invests in bonds, they will receive periodic coupon payments. Such income is taxable under the head

“Income from Other Sources” as per the Income Tax Act, 1961 at the applicable slab rates.