Bonds vs Debentures vs FD: Tax Treatment Comparison India 2026
Sunita had Rs. 5,00,000 sitting idle and was comparing a bank fixed deposit against a listed corporate bond paying a similar rate. Her assumption was that both would be taxed more or less the same way, since both simply pay interest. What she had not accounted for is that bonds and debentures carry a lower TDS threshold than an FD, and that if she sells before maturity, a bond can trigger capital gains tax in a way an FD never will. Bonds vs debentures vs FD looks like a simple rate comparison on the surface, but the tax treatment underneath is genuinely different across all three.
How Each Instrument Is Actually Structured
Before comparing tax treatment, it helps to be clear on what bonds vs debentures vs FD actually are structurally. A bank fixed deposit is a straightforward loan to the bank, you get your principal back at maturity along with interest, and there is no market to trade it on. A bond is a debt instrument issued by a government or company, and a debenture is essentially a bond issued by a company, the terms are often used interchangeably in India. Both bonds and debentures can be listed on a stock exchange, which means you can sell them before maturity at whatever price the market offers, and that market price can be higher or lower than what you paid. This one structural difference, the ability to trade before maturity, is what creates an entirely separate layer of tax that fixed deposits simply do not have.
Interest Taxation: Same Idea, Very Different TDS Rules
Interest from all three is taxed as income at your regular slab rate, there is no special rate here. Where they diverge is TDS. FD interest is covered under Section 194A, and banks only deduct 10% TDS once your interest crosses Rs. 40,000 a year, or Rs. 50,000 if you are a senior citizen. Interest on bonds and debentures falls under Section 193 instead, and for FY 2025-26 the threshold there is a much lower Rs. 10,000 a year, with the same 10% rate. This threshold also now applies to government securities, since an October 2024 change brought G-Secs and Floating Rate Savings Bonds under TDS for the first time, and a 2023 amendment removed the older exemption that used to protect listed, demat-held debentures from TDS altogether. In practice, this means a bond paying the same interest as an FD gets TDS deducted at a much lower income level, even though your final tax liability, once you file your return, may end up identical.
Capital Gains: Where FD Has Nothing to Offer
A fixed deposit has no capital gains concept at all, your principal does not fluctuate, and the only income is interest. Bonds and debentures are different the moment they are listed and tradeable. If you sell a listed bond or debenture after holding it for more than 12 months, the gain is treated as long-term and taxed at 12.5% with no indexation benefit. Sell within 12 months and it is short-term, taxed at your regular slab rate. Unlisted bonds and debentures get no long-term treatment at all. Under Section 50AA, any gain on an unlisted bond or debenture transferred, redeemed, or matured is deemed short-term, taxed at your slab rate, no matter how many years you held it. This makes the listed versus unlisted distinction genuinely important, not just a liquidity question. This dual nature, interest plus potential capital gains or losses, is the single biggest tax difference between a bond and a plain FD.
The Sovereign Gold Bond Exception, and Why the Rule Just Changed
Sovereign Gold Bonds deserve a separate mention because their tax treatment recently became stricter. Until March 31, 2026, any investor who held an SGB to its full 8-year maturity got a complete capital gains exemption, regardless of whether they were the original subscriber or had bought it later on the exchange. From April 1, 2026, that exemption is restricted to original subscribers only, investors who bought directly from RBI at the time of issue and held continuously for the full 8 years. If you bought an SGB on the secondary market, or if you exit early even through RBI’s 5-year premature redemption window, your gain is now taxed like any other bond, 12.5% if long-term, slab rate if short-term, with no indexation either way. The 2.5% annual interest on SGBs was always taxable at slab rate and remains so, this change only affects the capital gains portion at exit.
Bonds vs Debentures vs FD at a Glance
| Factor | Fixed Deposit | Bonds / Debentures | Sovereign Gold Bonds |
|---|---|---|---|
| Interest taxation | Slab rate | Slab rate | Slab rate |
| TDS section | Section 194A | Section 193 | Section 193 |
| TDS threshold, FY 2025-26 | Rs. 40,000 (Rs. 50,000 senior citizen) | Rs. 10,000 | Rs. 10,000 |
| Capital gains on sale before maturity | Not applicable | LTCG 12.5%, no indexation; STCG at slab | LTCG 12.5%, no indexation; STCG at slab |
| Gain at maturity | Not applicable, principal returned as agreed | Taxable if any premium built in | Exempt only for original subscriber, held full 8 years |
| LTCG holding period | Not applicable | 12 months if listed; unlisted gets no LTCG at all, always slab rate | 12 months if sold before maturity |
Worked Example: The Threshold Gap in Practice
Sunita earns Rs. 15,000 in interest for the year. On her FD, this stays comfortably under the Rs. 40,000 threshold, so no TDS is deducted at all. If the same Rs. 15,000 had come from a listed bond instead, it would have crossed the Rs. 10,000 threshold under Section 193, and the bond issuer would have deducted Rs. 1,500 in TDS before she ever saw the money. Her actual tax liability at the end of the year could be identical either way, this is purely a difference in when the tax gets collected, not how much is ultimately owed, and any excess TDS is refundable when she files her return.
Now suppose Sunita also sells a listed bond after 18 months for a Rs. 3,00,000 gain over her purchase price. Since she held it beyond 12 months, this is long-term, taxed at 12.5%, working out to Rs. 37,500. An FD could never generate this kind of gain or this kind of tax event, since its value does not move with the market. If that same Rs. 3,00,000 gain had come from an SGB at 8-year maturity, an original subscriber would pay nothing, while a secondary-market buyer would pay the same Rs. 37,500 as the bond, under the rules effective from April 2026 onward.
Which Should You Choose
If simplicity and predictable, non-tradeable returns matter most, an FD remains the easiest to understand from a tax standpoint, since there is only ever interest to account for. If you want the possibility of capital appreciation and are comfortable with the lower TDS threshold and the extra reporting that comes with tracking capital gains, listed bonds and debentures can work well, particularly in a portfolio where you might sell before maturity. If gold exposure through a bond structure interests you, buying an SGB directly from RBI at issue and holding it the full 8 years is now the only route to a genuinely tax-free outcome, since every other path into an SGB carries the same 12.5% LTCG exposure as an ordinary bond. For the full capital gains framework that applies across all of these, see my capital gains tax FY 2026-27 guide, and for FD-specific detail, my tax on fixed deposit interest guide covers Form 15G and 15H if you want to avoid excess TDS altogether.
Conclusion
Bonds vs debentures vs FD is not really a question of which is taxed more heavily, interest is taxed the same way across all three. It is a question of TDS timing and whether capital gains enter the picture at all. FDs stay simple because they never move in value. Bonds and debentures add a lower TDS threshold and a genuine capital gains layer the moment they are tradeable. SGBs sit in their own category now, rewarding only investors who buy at issue and hold the full course. Match the instrument to how you actually plan to hold it, not just the headline interest rate, and the tax outcome usually takes care of itself. For the complete tax picture, start with my complete income tax guide for India.
Frequently Asked Questions
Is TDS on bonds and debentures avoidable using Form 15G or 15H?
Yes, if your total income is below the taxable threshold, you can submit Form 15G, or Form 15H if you are a senior citizen, to the issuer to avoid TDS under Section 193, the same way you would for an FD under Section 194A.
Do tax-free bonds still exist, and are they different from this comparison?
Certain older government-notified bonds, mainly from issuers like NHAI and PFC issued years ago, do carry fully tax-exempt interest. No new tax-free bond issues have come to market recently, so this applies mainly to investors already holding older paper, and capital gains on selling those bonds are still taxable under the normal rules covered here.
What happens if I hold a bond to maturity instead of selling it?
If you hold to maturity and simply get your face value back, there is usually no separate capital gain to report beyond any accrued interest already taxed along the way. A gain only arises if you paid less than face value at purchase, or if you sell before maturity at a price above your cost.
Does the Rs. 10,000 TDS threshold on bonds apply per issuer or in total across all my bonds?
The threshold is applied per issuer, not across your entire bond portfolio. If you hold bonds from three different companies, each one only deducts TDS once your interest from that specific issuer crosses Rs. 10,000 in the year, even if your combined interest across all three is higher.
