Tax on debt funds and bonds

Part of Tax on investments. 6 min read. Free lesson with a short video, quiz and practice.

Debt investments, such as debt mutual funds, bonds and government securities, pay you through interest, through gains when you sell, or both. Since 2023–24, most of them are taxed much like an FD: at your slab rate.

Debt mutual funds

• Bought on or after 1 April 2023 (in funds that put more than 65% in debt): gains are always taxed at your slab rate, however long you hold.
• Bought before 1 April 2023: if held more than 24 months, long-term gains are taxed at 12.5% without indexation; otherwise at your slab rate.

One difference from an FD: a debt fund's gain is taxed only when you sell, not every year. Delaying tax this way can help a little over long periods.

Bonds and debentures

• Interest is taxed at your slab rate each year it is received or due. TDS may be deducted, and it shows in your AIS.
• Selling listed bonds on an exchange: held more than 12 months, the gain is taxed at 12.5%; otherwise at your slab rate.
• Unlisted bonds and debentures: since 23 July 2024, gains are taxed at your slab rate whatever the holding period.

Government securities and tax-free bonds

• Interest on G-Secs and state development loans is taxable at your slab rate. Treasury bills pay no interest; the discount you earn is taxed as a gain.
• Some older bonds from public-sector companies were issued as tax-free bonds. Their interest is fully exempt. You can still buy them on the stock exchange, but the price you pay changes the yield.

A worked example

Vikram invested ₹2,00,000 in a debt fund in 2024 and redeems it for ₹2,30,000 in 2026. His gain is ₹30,000. Because he bought after 1 April 2023, it is taxed at his slab of 30%: ₹9,000, plus cess = ₹9,360.

If he had kept the same money in an FD earning similar interest, he would have paid similar tax, but year by year as the interest was earned.

What to check

• The date you bought fund units (before or after 1 April 2023).
• Whether a bond is listed or unlisted.
• Post-tax return, not just the yield on offer.