How much capital gains tax do I pay on my NCDs?
Capital gains tax on listed NCDs is 12.5 percent if you sell on the exchange after 12 months. If you hold to maturity, the gain is treated as interest and taxed at your slab rate — a much costlier outcome.
Most investors believe NCD gains are taxed exactly like fixed deposits. They are not. The Capital Gains Tax in India rules for non-convertible debentures depend on whether you sell on the exchange before maturity, hold to maturity, or trade them frequently.
Get the classification wrong and you can pay up to 30 percent slab tax on what should have been a 12.5 percent long-term gain. Get it right, and you keep the difference.
The two ways money comes back from an NCD
An NCD pays you in two distinct cash flows:
- Coupon interest received during the holding period.
- Principal received either at maturity or when you sell the NCD on a stock exchange.
Each one is taxed differently. Confusing the two is the most common mistake retail investors make on NCDs.
How coupon interest is taxed
Interest received on an NCD is taxed at your income tax slab rate every year, regardless of how long you hold the bond. There is no special concession.
If you fall in the 30 percent slab and earn 50,000 rupees of NCD coupon interest in a year, you pay roughly 15,600 rupees in tax (including 4 percent cess). The interest gets added to "Income from other sources" in your tax return.
TDS applies if interest from a single issuer crosses 5,000 rupees in a financial year (10 percent for residents). You can claim credit for that TDS in your return.
How capital gain on NCDs is taxed
This is where it gets interesting. If you sell a listed NCD on the stock exchange before maturity, the difference between the sale price and your purchase price is a capital gain or loss.
Two regimes apply:
- Short-term capital gain (STCG): if you sell within 12 months of purchase. Taxed at your slab rate.
- Long-term capital gain (LTCG): if you sell after 12 months. For listed NCDs, taxed at 12.5 percent without indexation under the post-2024 regime.
The 12-month threshold for "long term" is specific to listed debentures. For unlisted debentures, the threshold is 36 months. Always confirm whether your NCD is listed on NSE or BSE.
What if you hold to maturity?
This is the part most investors get wrong. When you hold an NCD to maturity, you receive the face value back. The Income Tax Department treats the difference between face value and your purchase price as interest income, not capital gain.
That means even if you bought a 5-year NCD at a discount and held to maturity, the entire gain is taxed at your slab rate. The 12.5 percent LTCG benefit is lost the moment you let it redeem instead of selling on the exchange.
Example: you buy a 1,000 rupee face value NCD at 950 rupees and hold for 4 years. Coupon income each year is taxed at slab. The 50 rupee gain at maturity is also taxed at slab — not as LTCG.
This is the single biggest tax trap in NCD investing.
Sale on exchange vs hold to maturity: tax compared
| Action | Holding period | Tax treatment |
|---|---|---|
| Sell on exchange after 12 months (listed) | More than 12 months | LTCG at 12.5% without indexation |
| Sell on exchange within 12 months (listed) | Less than 12 months | STCG at slab rate |
| Hold to maturity | Any tenure | Gain taxed as interest at slab rate |
| Sell unlisted NCD (any time) | Less than 36 months → STCG slab; more → LTCG 12.5% | Different threshold from listed |
Read this table twice. The difference between selling 11 months in versus 13 months in could be 17 to 18 percentage points of tax for a high-bracket investor on a listed NCD.
A worked example for a 30 percent slab investor
Take Ananya, who bought 100 listed NCDs of 1,000 rupees each at 1,020 rupees per NCD. After 18 months, the market price is 1,080. She has two choices.
Option 1: Sell on the exchange. Capital gain is 60 rupees per NCD, total 6,000 rupees. Tax = 12.5 percent of 6,000 = 750 rupees.
Option 2: Hold to maturity in another 24 months. The redemption gain at face value (1,000 minus 1,020 = a loss of 20 rupees per NCD) is treated as part of interest income, recognised over the holding period. Plus, the appreciation she could have captured on the exchange (60 rupees) is now lost. The 12.5 percent rate is gone.
Selling on the exchange after 12 months wins by a wide margin for high-bracket investors holding capital appreciation.
What about TDS on NCD redemption?
If you redeem at maturity, the issuer typically deducts TDS at 10 percent on the interest portion (subject to thresholds). The principal repayment portion is not subject to TDS.
If you sell on the exchange, no TDS applies — capital gains tax on listed securities is paid by you directly when filing your return. Maintain a clean record of purchase price, sale price, and dates from your demat statement.
Mistakes that cost money
- Letting a listed NCD redeem at maturity when you could have sold on the exchange after 12 months at a similar price.
- Forgetting that interest is fully taxable each year — even if reinvested via cumulative bonds.
- Holding NCDs in a demat where TDS records are missed at filing time.
- Ignoring the unlisted vs listed distinction. Unlisted NCDs need 36 months for LTCG benefit.
- Confusing tax-free bond interest with NCD interest. Tax-free bonds (issued by approved entities) are exempt; ordinary NCDs are not.
Quick rules to follow
- Check listing status before you buy. Prefer NSE/BSE-listed NCDs for tax-flexible exits.
- Plan to sell on the exchange after 12 months if you have a capital appreciation.
- Reconcile interest TDS in your tax return; the issuer issues a Form 16A for the financial year.
- Keep purchase contract notes safely. Tax officers ask for them during scrutiny.
- For full official guidance, refer to the NCD-related sections on the Income Tax Department portal.
NCDs are not glorified fixed deposits. They have a tax structure of their own that rewards informed investors and quietly punishes the rest. Understanding the listed vs unlisted, sell vs hold distinctions can save you several percentage points on every NCD trade you ever do.
Frequently Asked Questions
- Are NCDs taxed like fixed deposits?
- Only the coupon interest is taxed similarly — at your slab rate annually. Capital appreciation when you sell a listed NCD on the exchange after 12 months is taxed at 12.5 percent under LTCG rules.
- Should I sell my listed NCD before maturity for better tax treatment?
- Often yes. Selling on the exchange after 12 months gets you the 12.5 percent LTCG rate. Holding to maturity converts the same gain into interest income taxed at your slab rate.
- Is TDS deducted on NCD interest?
- Yes, typically 10 percent for residents if interest from a single issuer crosses 5,000 rupees in a year. Take credit for the TDS in your tax return.
- What is the holding period for unlisted NCDs?
- Unlisted NCDs need 36 months of holding for long-term capital gains treatment, compared with 12 months for listed NCDs.