RBI Retail Direct Government Bonds: How will interest, capital gains be taxed?
Income tax on government bonds is payable in two ways. First, you will be taxed if you realize capital gains on the sale of government bonds before the maturity date in the secondary market. Second, the interest you earn on those bonds will also be taxed.
Income tax on capital gains realized on government bonds
Selling government bonds in the secondary market can lead to capital gains or losses. If you sell the bonds at a higher price than the one for which you bought them (primary or secondary market), you will realize a capital gain. On the other hand, if the price at which the bonds are sold is lower than the price at which they were bought, then you will suffer capital losses.
S Vasudevan, Executive Partner, Lakshmikumaran & Sridharan Attorneys says: “Capital gains / losses are classified as short term and long term based on the period the asset is held. If government bonds (listed on a recognized stock exchange) are sold after holding them for a period of more than 12 months, the gains / losses will be classified as long term. On the other hand, if the period is less than or equal to 12 months, then the gains / losses are classified as short term. ”
The tax rate applicable to these short-term and long-term capital gains is different. “Short-term capital gains made on government bonds are taxed at the normal rate applicable to an individual’s income. “said Vasudevan.
Here, individuals should keep in mind that the tax rules for listed government bonds and debt mutual funds are different. The tax rules for debt mutual funds were modified as of April 1, 2015. “The government as of the 2014-15 fiscal year changed the provisions relating to the taxation of debt mutual funds . Mutual funds could be taxed at 20% (with indexation) or 10% (without indexation) at the choice of the individual. However, the government has removed the option of using a 10% rate (without indexation) for shares (including mutual debt shares). fund), ”says Vasudevan.
Debt mutual funds include mutual fund systems that invest in debt securities, including those that only invest in government securities and gilts. Such mutual fund systems are commonly referred to as golden mutual fund systems. Therefore, the taxation of long-term capital gains realized on mutual fund units of gilts and those realized on gilts purchased directly is different.
Taxation of listed government bonds vs debt UCITS
|Listed debt mutual fund||Listed government bonds|
|Holding period to be classified as long term||36 months||12 months|
|Long-term capital gains tax rate||20% (with indexation)||10% (without indexation)|
With regard to government bonds, in the event of losses, a natural person is allowed to offset short-term losses of government bonds with other long-term or short-term capital gains of other securities such as stocks, mutual funds, etc. by income tax laws. However, keep in mind that the long-term depreciation of government bonds can only be adjusted by the long-term gains of other securities such as stocks, mutual funds, placement, etc.
Income tax on interest earned on government bonds
Interest earned on government bonds is taxed as interest income from bank term deposits. That is, the interest received by you will be taxed at the rate of income tax applicable to your income, depending on the tax regime you have chosen. In addition, in accordance with Article 193 of the Income Tax Act, interest payable on any security (including government bonds) of the central government or the state government is not subject to the TDS.