So i’ve been browsing listings on wint wealth and theres quite a few senior secured corporate bonds with 1 to 3 year tenures offering around 10% yield. Looks attractive on the surface but wanted to think through the tax side before jumping in.
So the interest income gets taxed at your slab rate right? For someone in 30% bracket thats effectively 7% post tax. And on top of that theres 10% TDS being deducted on coupon payments for listed bonds above 5000 rupees. So the actual cash in hand experience is even more annoying from a cash flow perspective even if you do get TDS credit at the end of the year.
Is 7% post tax on a corporate bond actually worth it in 2026? Curious what others think.
yeah this is the right question to ask and most people dont bother doing this math before investing.
So just to be clear for anyone reading, the interest income from these bonds is fully taxable at your slab rate, theres no getting around that. The 10% TDS on listed corporate bond coupons has been in place since april 2023 and there was a lot of noise about getting it removed or the threshold raised but nothing changed in the last budget as far as i know.
The capital gains part is slightly more interesting. If you hold a listed bond for more than 12 months and sell it, you pay LTCG at 12.5% flat with no indexation. But if its an unlisted bond, under section 50AA all gains are treated as STCG at your slab rate regardless of how long you hold it. So for unlisted bonds you get absolutely zero tax efficiency no matter how patient you are.
For someone in 30% slab buying an unlisted corporate bond at 10%, post tax yield is 7%. And you need to then ask if 7% is enough compensation for the credit risk of a non sovereign issuer.
yes exactly. And i think people sometimes confuse listed vs unlisted without realising how much it matters for tax. A lot of the bonds showing up on these platforms are technically listed on BSE or NSE but the liquidity is near zero so it feels unlisted even if it technically isnt.
I’ve invested in a few of these over the past year and while i dont regret it, i went in without fully understanding the XIRR vs actual return difference and i think thats worth flagging here.
Most of the bonds on these platforms have quarterly or monthly principal repayments alongside coupon payments. So the XIRR shows up as 10% or even 10.5% but thats assuming you reinvest every repayment immediately at the same rate. In practice thats not happening. What you actually earn in interest on your full invested principal is closer to 6 to 6.5% annually depending on the repayment schedule.
So after tax in the 30% bracket your real yield on actual interest recieved is more like 4.2 to 4.5%. Which is honestly not great at all for the level of credit risk in some of these issuers.
@gaurang this point about intermittent principal repayment is so underrated and i dont see it discussed enough.
The XIRR calculation is mathematically correct but it creates a misleading picture for retail investors who dont have the time or infrastucture to reinvest every 3 months efficiently. The platforms are not doing anything wrong by showing XIRR but as an investor you should always calculate the simple interest yield on your full principal and then apply your tax rate to that.
Also want to add something about the TDS angle since Mahesh raised it. Even though TDS is at 10% and you get credit for it when filing, it does affect your cash flow through the year. For retirees or people who depend on this income, having 10% deducted upfront before it hits your account can be a real nuisance even if you recover it at filing time.
I want to offer a different perspective here as a retiree.
Im in the 5% tax slab because my total income after deductions is under the threshold. So for me post tax yield on a 10% bond is almost 10% itself, TDS gets fully refunded. The math looks completely different.
For people like me in lower tax brackets, senior secured bonds with decent credit ratings are actually a very good option. The key word being decent credit ratings. I only look at AA or above honestly. The extra 40 to 50 bps yield from going down to A rated paper is not worth the sleep loss for someone my age.
The budget 2025 income tax relief up to 12 lakh under new regime also helps retirees who structure their income carefully. If your total income stays under that threshold, bond interest is effectively tax free under the rebate.