The dichotomy between taxation of bond and bond mutual funds
Holding period for LTCG eligibility is one year for bonds and three years for bond funds
We have discussed previously, the rules of taxation for bond and bond mutual funds. To recap, in bonds, the coupons i.e. interest payments are taxable at your marginal slab rate. For most investors, the marginal slab rate is 30% plus surcharge and cess. Capital gains, which occur when you sell your bond at a price higher than your purchase price, is taxable at a defined rate. The rate is 10% plus surcharge and cess, when you sell the bond after holding it for at least a year, provided the bond is listed at the stock exchange. The holding period of one year makes it taxable as Long Term Capital Gains (LTCG). Obviously, 10% is a relatively lower rate than the marginal tax bracket of most investors.