The tax treatment of bond income depends on the type of bond and the nature of the income. Generally, bond income is taxable under the head 'Income from Other Sources'. Interest income from bonds is fully taxable in the hands of the investor at the applicable tax rate based on their income tax slab. The tax treatment also varies depending on whether the bonds are government bonds or corporate bonds.

What Is the Tax on Interest Income from Bonds?

Interest income from bonds is fully taxable as per your income tax slab. For example, if you fall in the 30% income tax bracket, the interest you earn from bonds will be taxed at 30%. There is no special tax treatment for bond interest unless the bond is a tax-free bond, which typically applies to specific government bonds. Tax-free bonds' interest is not subject to tax during the holding period.

Are Bonds Taxable at the Time of Purchase?

No, bonds are not taxable at the time of purchase. You do not pay any tax when you purchase bonds. However, the income you receive from bonds in the form of interest is taxable in the year it is received. The principal amount is not taxable unless you sell the bond before maturity and make a capital gain.

How Are Bonds Taxed When Sold Before Maturity?

If you sell a bond before maturity and make a profit, that profit is treated as a capital gain. The tax treatment depends on the holding period. If the bond is held for more than 36 months, it is considered a long-term capital gain (LTCG), which is taxed at 20% with indexation benefits. If held for less than 36 months, it is a short-term capital gain (STCG), which is taxed according to your income tax slab.

Are There Any Special Tax Benefits for Government Bonds?

Yes, government bonds often come with tax benefits. For example, certain government bonds are tax-free, meaning that the interest earned on them is not taxed. However, government bonds are still subject to tax on capital gains if sold before maturity. Tax-free bonds are usually offered by the government or public sector enterprises and have a fixed interest rate.

How Are Corporate Bonds Taxed?

Corporate bonds are taxable in the same way as other bonds. Interest income is fully taxable as per your income tax slab. Additionally, if you sell corporate bonds before maturity and make a profit, it will be subject to capital gains tax. Corporate bond interest rates are generally higher compared to government bonds due to the higher risk involved.

Are There Any Deductions for Bond Interest Income?

No, there are no specific deductions available for bond interest income under Section 80C or any other section for interest earned on bonds. However, if you invest in certain tax-saving bonds, like the 7-year National Savings Certificate (NSC), you can avail of tax benefits, but this does not apply to most bonds. Bond income is taxed directly based on your income tax slab.