Want to make a bond investment? Be aware of tax rules if you buy a bond on the primary market and keep it until it matures. 

In India, there are many different bond kinds, and investors aim to buy these bonds with the hope of earning interest as well as capital growth.

Before making an investment selection, you should consider the advantages and tax ramifications of each bond because they are taxed differently based on their type and holding duration.

Bond interest is typically taxed unless otherwise stated. If not, the terms—tax-free, capital gain, etc.—would be stated in the bond's name.

If a bond is bought on the primary market (when it is first sold) and kept until it matures, what tax rules will apply?

In this situation, Dr. Suresh Surana, the founder of RSM India, discusses the tax regulations for various kinds of bonds:

Bond taxation is based on the bond's listing status (listed or unlisted) as well as how long the bond is held.

If the bonds are kept for a period of time greater than a year, the capital gains from listed bonds would be long-term in nature; otherwise, such profits would be classified as short-term. Short-term capital gains from bonds will be taxed at the investor's marginal tax rate, while long-term capital gains from bonds will be taxed at a rate of 20% under Section 112 of the Income Tax Act of 1961 (hence referred to as "the IT Act"). Even though the above tax rates would apply to unlisted bonds, the threshold for determining long-term capital gains would be 36 months instead of 12 months. This means that gains from such bonds would only be considered long-term if they were held for more than 36 months; otherwise, they would be treated as short-term gains.

It's important to know that, with the exception of Capital Indexation Bonds and Sovereign Gold Bonds, long-term capital gains from bonds can't get an indexation advantage.

Given that the bonds are bought from the primary market, it is reasonable to presume that they are listed bonds.

A. A 12-month window is used to determine whether a capital gain is short-term or long-term. The 36-month threshold period would apply if the same weren't stated.

B. Current tax rates for each circumstance: Short-term capital gains are taxed at the marginal slab rates, while long-term capital gains are taxed at 20%.

However, it should be noted that, if Sovereign Gold Bonds are held until maturity, no capital gains will be realised under Section 47(viic) of the IT Act.