How are bonds taxed in India

Interest from ordinary bonds and debentures is taxable at your normal slab rate as income, the year it accrues or is received. So a regular bond's coupon is added to your income and taxed like other interest.

Certain government-backed "tax-free bonds" pay interest that is fully exempt from tax. The interest is lower to reflect this, but for higher-slab investors the after-tax return can be attractive. The exemption is on the interest only.

If you sell a bond before maturity, any gain is a capital gain, short-term or long-term by holding period, taxed under the applicable rules. Listed and unlisted bonds can differ, so check the holding-period treatment for your specific bond.

Section 54EC bonds are a special category used to save tax on long-term capital gains from land or building — you invest the gain (capped at Rs 50 lakh) within six months, with a lock-in. Their interest is taxable, but the point is the capital-gains exemption they unlock.

Bond interest is reported to the tax department and appears in your AIS. Report taxable interest each year, treat tax-free bond interest as exempt, and reconcile against your AIS — omissions are a common trigger for notices.