NISM-Series-X-B: Investment Adviser (Level 2) · Taxation of Debt Products

Capital Gains on Bonds and Debentures: Holding Period and Tax Rates

Updated 11 October 2026 · Fact-checked

Capital gain on a bond or debenture is sale price minus cost of acquisition and transfer expenses. A listed bond held more than 12 months gives long-term gain taxed at 12.5% without indexation. Shorter holding is taxed at slab rates. Unlisted bonds and debentures transferred on or after 23 July 2024 are always short-term.

Understand Capital Gains on Bonds and Debentures

A bond or debenture pays you interest while you hold it. If you sell it before maturity at a price different from what you paid, the difference is a capital gain or loss. Interest and capital gain are taxed separately. Interest is taxed under Income from Other Sources (or business income). The price difference is taxed under Capital Gains.

The tax depends on two things: whether the security is listed on a recognised stock exchange, and how long you held it. The holding period starts on the date of purchase and ends on the date of transfer. A short-term capital gain (STCG) arises when the holding is within the limit. A long-term capital gain (LTCG) arises when it is beyond the limit.

For listed bonds and debentures, the limit is 12 months. Hold for more than 12 months and the gain is long-term. Hold for 12 months or less and it is short-term. Short-term gains are added to your total income and taxed at your slab rate. Long-term gains on listed bonds are taxed at a flat 12.5% under the rules applicable to transfers on or after 23 July 2024. No indexation is allowed.

For unlisted bonds and debentures transferred, redeemed or matured on or after 23 July 2024, the gain is treated as short-term whatever the holding period. It is taxed at slab rates. Earlier, unlisted debt held for more than 24 months was long-term with indexation. That benefit no longer applies for such transfers. Market linked debentures are also deemed short-term.

Indexation means raising the cost for inflation using the Cost Inflation Index. For bonds and debentures, you should treat indexation as not available under current rules. Always read the question date and the workbook edition. Older questions may still use earlier rates, so check what the question assumes.

Key formulas to remember

Capital gain: Capital gain = Full value of consideration − (Cost of acquisition + Expenses on transfer); Brokerage and similar costs of buying and selling are allowed. Securities Transaction Tax is not deducted.
Holding period – listed bonds/debentures: Long-term if held > 12 months; short-term if held ≤ 12 months; Exactly 12 months is still short-term. It must be more than 12 months.
Tax on STCG – listed bonds/debentures: Taxed at normal slab rates; Gain is added to total income. Surcharge and 4% cess apply as applicable.
Tax on LTCG – listed bonds/debentures: 12.5% without indexation (transfers on or after 23 July 2024); Plus applicable surcharge and 4% health and education cess.
Unlisted bonds/debentures: Deemed STCG at slab rates, regardless of holding period (transfers on or after 23 July 2024); Applies to transfer, redemption or maturity. No indexation.
Interest vs capital gain: Interest = Income from Other Sources; price difference = Capital Gains; Never mix the two in one computation.

How to solve Capital Gains on Bonds and Debentures questions

Use this order for any question on capital gains from bonds or debentures.

1Note the date of transfer. Check whether it is on or after 23 July 2024, since the rules changed on that date.
2Identify whether the security is listed or unlisted.
3Work out the holding period from the purchase date to the sale date. For listed securities, compare it with 12 months.
4Classify the gain. Listed and held more than 12 months is long-term. Listed and held 12 months or less is short-term. Unlisted is deemed short-term.
5Compute the gain: sale value minus purchase cost minus brokerage and other transfer expenses. Leave out accrued interest.
6Apply the rate. Use 12.5% for long-term listed gains with no indexation. Use the slab rate for short-term gains.
7Add 4% cess (and surcharge if the question gives it). Then check your answer against the options for trap values.

Quickest way: Two-question shortcut

When to use it: Use this when you have under a minute for a classification or rate question.

Ask first: is it listed? If not listed, answer short-term at slab rate and stop.
If listed, ask: more than 12 months? Yes means 12.5% with no indexation. No means slab rate.
For a numerical question, compute the gain once, multiply by the rate, then multiply by 1.04 for cess if cess is mentioned.

Common mistakes in Capital Gains on Bonds and Debentures

Using 24 months for unlisted debentures to claim long-term status.
Older material gave a 24-month limit for unlisted securities.
Fix: For transfers on or after 23 July 2024, unlisted bonds and debentures are deemed short-term. Check the date in the question.
Applying indexation to long-term gains on listed bonds.
Students link LTCG with indexation from property or older debt fund rules.
Fix: Listed bonds get no indexation. The 12.5% rate is applied to the plain gain.
Treating exactly 12 months as long-term.
The word 'twelve months' sounds like it qualifies.
Fix: The holding must be more than 12 months. Exactly 12 months is short-term.
Including accrued interest in the capital gain.
The sale price in the market may include accrued interest.
Fix: Interest is taxed as income from other sources. Only the price difference is capital gain.
Deducting STT while computing the gain.
Students treat all trading costs alike.
Fix: Brokerage is allowed. Securities Transaction Tax is not deductible.
Taxing short-term gains at a flat rate.
Confusion with the special rates for listed equity.
Fix: Short-term gains on bonds go into total income and are taxed at the slab rate.

Worked examples

Example 1

Anita, a resident individual, buys 100 listed debentures at ₹1,020 each and pays brokerage of ₹500. After 14 months she sells them at ₹1,100 each and pays brokerage of ₹500. Transfer is after 23 July 2024. Find the tax on the gain, including 4% cess. Ignore surcharge.

Show the solution

Listed and held 14 months, which is more than 12 months. So the gain is long-term.
Sale value = 100 × ₹1,100 = ₹1,10,000. Less selling brokerage ₹500 gives net ₹1,09,500.
Cost = 100 × ₹1,020 = ₹1,02,000. Add buying brokerage ₹500 to get ₹1,02,500.
LTCG = ₹1,09,500 − ₹1,02,500 = ₹7,000.
Tax at 12.5% with no indexation = ₹875.
Cess at 4% = ₹35. Total = ₹910.

Answer: LTCG is ₹7,000. Tax including cess is ₹910.

Example 2

Ravi, in the 30% slab, bought unlisted debentures for ₹5,00,000 and sells them after 30 months for ₹6,00,000. The transfer is after 23 July 2024. Ignore expenses and surcharge. Find the tax on the gain including 4% cess.

Show the solution

The debentures are unlisted and the transfer is on or after 23 July 2024. The gain is deemed short-term whatever the holding period.
Gain = ₹6,00,000 − ₹5,00,000 = ₹1,00,000.
No indexation is allowed.
Tax at slab rate 30% = ₹30,000.
Cess at 4% = ₹1,200. Total = ₹31,200.

Answer: The gain is ₹1,00,000, taxed as short-term at 30%. Total tax with cess is ₹31,200.

Exam tips

Read the transfer date and the listed or unlisted status before you do anything else. They decide the answer.
Remember the two key numbers: more than 12 months for listed, and 12.5% without indexation for long-term listed gains.
Trap options often show 24 months, 20% with indexation, or 10%. These are older rules. Choose them only if the question clearly uses the old regime.
On a 2-mark caselet question, wrong answers cost more under negative marking. Check the gain and rate before you commit.
Keep interest and capital gain apart. If a question mentions both, compute them separately.

Practice questions from Taxation of Debt Products

Capital Gains on Bonds and Debentures in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

Capital Gains on Bonds and Debentures: frequently asked questions

What is the holding period for long-term capital gain on listed bonds?

A listed bond or debenture must be held for more than 12 months. Holding it for exactly 12 months or less gives a short-term gain.

How are unlisted debentures taxed on sale?

For transfers, redemptions or maturities on or after 23 July 2024, the gain is deemed short-term. It is taxed at your slab rate, whatever the holding period.

Is indexation available on bonds and debentures?

Not under current rules for transfers on or after 23 July 2024. Long-term gains on listed bonds are taxed at 12.5% without indexation.

Is interest received on a bond a capital gain?

No. Interest is taxed as income from other sources. Only the profit on selling the bond above cost is a capital gain.

Is the tax rate the same for listed equity shares and listed bonds?

No. Listed equity has its own holding period and rates. Do not apply equity rules to bonds. Use the bond rules in this guide.