Tax on G sec (bonds specifically) in FY 2023

  1. Current FD return is 7.1%. Post tax (30% slab) that becomes 4.9%

  2. OTOH in Gsec (3-5 year ones) return is around 7.x% but LTCG is 10% so post tax return is 6.x%.

  3. I read on few pages that LTCG for bonds is considered if held for more than 1 year.

considering above, I am thinking of buying some 3 year Gsec. (Directly from rbi retail direct).

Question - is my understanding of points 2 and 3 above correct?

The favourable tax treatment for bonds has been done away with.

Now bonds are taxed at par with FDs, irrespective of your holding period.

Capital gains on these bonds are of two categories — long term capital gains and short term capital gains. In the case of listed bonds, if the holding period is more than 12 months, the realised returns are termed LTCG. When the holding period is below 12 months, individuals earn short term capital gains upon the sale of these bonds. STCG is taxed at applicable slab rates, while LTCG is taxed at a rate of 10% without indexation.

Source Taxation of Bond Investments - Taxation systems for various bonds in India

So is this article wrong?
Also can you point me to some source which say tax for FD and bonds are same.

Debt Mutual Funds will be taxed unfavourably after April 2023 » Capitalmind - Better Investing

Also, in case of listed bonds, capital gains don’t arise often because bonds pay interest every 6 months. This interest income would be taxed as per the slab rate.

Hey @warkaree

Interest Income from Bonds is taxed as per slab rates. Moreover, appreciation in bond prices is considered capital gains. If the holding period is more than 12 months, it is considered LTCG, and the same is taxed at 10% without indexation u/s 112.

thanks @Quicko !!
sorry I have few more questions -

  1. How can I find out if a bond pays interest (quarterly, half yearly etc.)?
  2. I plan to hold the bond till maturity. In this case do I get the entire bond amount at maturity or it is paid at regular intervals?

here is the bond that I have purchased.

Security Category CG
Security 06.99 GOVT. STOCK 2026
ISIN IN0020230028
Maturity Date 17-Apr-2026

Hi @warkaree ,

Please go through the link to know how to interpret SDL, T-bill, and G-secs names or symbols

Also, here is the explanation on GSec taxation:

Short answer, understanding in point 2 is incorrect, point 3 is correct.

When you say return is around 7% that is essentially rate of interest paid,
Taxation on interest payout is at slab rate so in a way bond taxation is same as FD.

There is a chance that if you sell bonds before maturity, then you might make capital gains (or loss), only this capital gain is taxed at 10%. But generally this is very small portion. Most of your bond income comes from interest paid out, which is taxed at slab

All Gsecs pay half yearly interest. Shubh maintains a list of govt. bonds and their interest payout date. This is good reference to find out interest payout dates. Or you can simply search with ISIN

For GSec you will get interest payout every 6 months (Which is taxable at your slab rate). at maturity you will be paid face value of bond (this might be different then what you invested to buy it)
Also if you hold till maturity, there will be no capital gains (or loss).

Hope this helps.

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@Akash_Shah Thanks for the detailed answer. Its much clear to me now.

One follow up question - you said capital gain/loss is made if one sells the bond before maturity. Where can one sell it? If purchased via RBI Retail Direct, is NDS-OM portal the place to buy/sell bonds (and T bills also)?

Depends how you bought it and where bonds are held. If it is held in your demat account, you can directly sell it through broker (like zerodha).
However liquidity is not always good for these bonds

I think there is a separate retail NDS-OM portal. That should be the one to buy/sell.

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Hi @warkaree,

As correctly mentioned by @Akash_Shah, G- Sec bonds pay interest on half yearly basis.

Further, at the time of maturity, you will be receiving the entire value, that is, face value of the bond.