How you can save 60% in taxes by selling listed bonds after 12 months
rate for LTCG, not the slab rate. This benefit is only available for listed bonds. The 2024 Budget brought in slab rate taxation for unlisted bonds regardless of the holding period.
Your gains, in this case, can include both accrued interest and ‘genuine’ capital gains - but the tax system doesn’t distinguish between the two. Let’s say you buy a bond for ₹100. It has a three-year tenor and a coupon (interest) of 10% payable on maturity.
After two and a half years, it has accrued interest of ₹25. Now, you sell the bond for ₹125. You are taxed at 12.5% on this gain of ₹25 rather than your marginal rate, which could be 30% at the highest slab rate.
In this case, you pay a tax of ₹3.1 instead of ₹7.5, which is about 60% less. Most bonds, however, offer periodic coupon payments rather than cumulative interest on maturity. Even in this case, selling the bond saves some tax.
For example, in the above example, say the coupon payment is annual and the maturity value is also ₹100. This means you would have got ₹10 each in the first and second year, and paid tax at your slab rate (30%). However, in the third year, your accrued interest is ₹5.
This would get taxed as capital gains, assuming you sell the bond with the accrued interest embedded in the sale price–in this case, ₹105. “Selling a bond before maturity can convert accrued interest to capital gains. This is assuming you have held it for 12 months for listed bonds and you are following the cash system of accounting and not the accrual system," said Gautam Nayak, partner, CNK Associates.
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