Indexation, LTCG & Reporting Rules for Debt Instruments in India

Introduction

Debt instruments—such as government securities, corporate bonds, municipal bonds, securitised products, and structured bonds—are subject to distinct tax rules in India. Two of the most important concepts for investors are indexation and Long-Term Capital Gains (LTCG), along with how these instruments must be reported in the Income Tax Return (ITR).

This guide explains how indexation works, when it applies, how LTCG is computed, and what reporting rules govern debt securities—entirely based on tax law frameworks.

Debt instruments broadly include:

• Government securities (G-Secs, T-Bills, SDLs)

• Corporate bonds

• PSU & quasi-sovereign bonds

• Municipal bonds

• Perpetual & callable structures

• Securitised instruments (ABS, MBS, PTCs)

• Zero-coupon or deep-discount bonds

Tax rules vary across each category depending on structure, listing status, and holding period.

Why LTCG and Reporting Rules Matter

Taxation affects:

• net post-tax cash flows

• reinvestment planning

• holding period decisions

• reporting accuracy in ITR

Understanding LTCG rules does not predict future returns—it simply clarifies how taxation works.

Indexation: What It Means

Indexation adjusts the “cost of acquisition” using the Cost Inflation Index (CII) published by the Income Tax Department. Indexed Cost=Original Cost×CII of Sale YearCII of Purchase Year\text{Indexed Cost} = \frac{\text{Original Cost} \times \text{CII of Sale Year}}{\text{CII of Purchase Year}}Indexed Cost=CII of Purchase YearOriginal Cost×CII of Sale Year​ Purpose: Indexation factors inflation into the cost of the asset, thereby modifying capital gain calculations.

When Indexation Applies (And When It Doesn’t)

Indexation Applies To:

• Certain long-term unlisted debt instruments (subject to tax rules applicable for that year)

• Some zero-coupon bonds (as defined under specific sections)

• Debt instruments specifically permitted by tax law

Indexation Does Not Apply To:

• Listed bonds and debentures

• Listed government securities

• Listed corporate bonds

• Most market-linked debentures

• Debt mutual funds (post 2023 rules)

It is important to confirm through current tax frameworks whether indexation is permitted for a specific instrument and year.

LTCG Rules for Listed Debt Instruments

Listed debt instruments—including:

• listed corporate bonds

• listed government securities

• listed municipal bonds (unless notified as tax-free)

—follow these general rules:

Holding Period

• LTCG: Held ≥ 12 months

• STCG: Held < 12 months

Tax Treatment

• STCG taxed at slab rate

• LTCG taxed as per rules for listed debt instruments (without indexation)

Listed bonds do not receive indexation benefits.

LTCG Rules for Unlisted Debt Instruments

Unlisted instruments follow a longer holding period requirement:

Holding Period

• LTCG: Held ≥ 36 months

• STCG: Held < 36 months

Tax Treatment

• STCG taxed at slab rate

• LTCG taxed at the applicable rate determined by prevailing law

Some unlisted bonds may qualify for indexation, depending on tax rules and structure

The applicability depends on the instrument type and tax section.

STCG vs LTCG: How Holding Period Impacts Tax

Short-Term Capital Gains (STCG)

Taxed as per the individual’s income-tax slab.

Long-Term Capital Gains (LTCG)

Taxed differently based on:

• listed vs unlisted nature

• indexation availability

• special provisions for securitised assets or zero-coupon bonds

Understanding the holding period is essential for categorising gains correctly.

Reporting Requirements in ITR

Debt instruments may need to be reported in:

1. Schedule CG — Capital Gains

For STCG or LTCG from sale/redemption.

2. Schedule OS — Other Sources

Interest income is reported here.

3. Schedule AL (Assets & Liabilities)

Applicable for individuals exceeding specific income thresholds.

4. Schedule SI (Special Rate Income)

If LTCG on debt instruments is taxed at special rates.

Document Requirements

• Purchase invoices

• Demat statements

• Contract notes

• Redemption statements

Accurate reporting ensures compliance with tax regulations.

Taxation for Zero-Coupon & Discount Instruments

Zero-Coupon Bonds

Tax treatment depends on classification under the Income Tax Act.

Deep-Discount or Accrual Bonds

• Appreciation may be taxed annually or at redemption depending on structure

• Where indexation is permitted, specific rules apply

• Investors should refer to offer documents and tax circulars due to structural variations.

Tax Rules for Perpetual, Call, & Structured Debt

Perpetual Bonds

• Interest taxed at slab rate

• Capital gains depend on listed/unlisted status

• Call/redemption dates influence holding period categorisation

Callable & Puttable Bonds

Capital gains depend on whether the bond is sold in the market or redeemed early.

Structured Debt Instruments

ABS, MBS, and PTCs may follow pass-through taxation frameworks:

• Income taxed in the hands of the investor

• No indexation in most structures

• Rules may vary based on regulatory updates.

Debt Mutual Funds vs Direct Bonds (Indexation Context)

Before 2023

Debt mutual funds received indexation for LTCG.

After 2023 (Finance Act Changes)

Most debt mutual funds no longer receive indexation and are taxed at slab rates.

Direct Bonds vs Mutual Funds

Direct bonds retain their own tax structure (listed/unlisted rules), independent of mutual fund changes.

Example: Illustrating LTCG Calculation Framework

Illustrative Example (Neutral)

An unlisted bond purchased at ₹100 and sold at ₹120 after 48 months.

Step 1: Identify if LTCG applies Holding period > 36 months → LTCG.

Step 2: If indexation is permitted Indexed Cost=100×CII of sale yearCII of purchase year\text{Indexed Cost} = 100 \times \frac{\text{CII of sale year}}{\text{CII of purchase year}}Indexed Cost=100×CII of purchase yearCII of sale year​

Step 3: LTCG = Sale Price – Indexed Cost The calculation outcome depends purely on CII values and tax rules. This example is for understanding mechanics, not performance.

Common Mistakes Investors Should Avoid

1. Confusing interest taxation with capital gains

They are taxed under different heads.

2. Assuming all bonds provide indexation

Most listed instruments do not.

3. Ignoring holding period rules

12 months vs 36 months significantly changes taxation.

4. Overlooking reporting requirements

Debt instruments must be disclosed properly in the ITR.

5. Misinterpreting discount bonds

Discount ≠ capital gain unless specifically classified so.

How BondScanner Helps Provide Transparency

BondScanner provides:

• issuer details

• maturity information

• security type

• listed/unlisted classification

• offer documents

• coupon schedule

These help investors understand bond characteristics using disclosed information.

BondScanner does not provide personalised tax or investment advice.

Conclusion

Indexation, LTCG rules, and reporting requirements form an essential part of analysing debt instruments in India.

Understanding listed vs unlisted treatment, holding periods, and tax disclosures helps investors interpret bond characteristics more accurately.

A structured approach ensures clarity and compliance when dealing with debt-market taxation.

Disclaimer

This blog is intended solely for educational and informational purposes. The bonds and securities mentioned herein are illustrative examples and should not be construed as investment advice or personal recommendations. BondScanner, as a SEBI-registered Online Bond Platform Provider (OBPP), does not provide personalized investment advice through this content.

Readers are advised to independently evaluate investment options and seek professional guidance before making financial decisions. Investments in bonds and other securities are subject to market risks, including the possible loss of principal. Please read all offer documents and risk disclosures carefully before investing.