Union Budget 2026: Wishlist for Indian bond investors
Currently, interest earned from bonds is taxed at the investor’s applicable slab rate, unlike equities where a clear distinction exists. (AI image)
By Vishal GoenkaAs India aspires to build a resilient, diversified, and globally competitive financial system, the role of a deep and vibrant bond market cannot be overstated. This is also evident in NITI Aayog’s recent report on ‘Deepening the Corporate Bond Market’ which sets the policy roadmap for next 5 years. Fixed income is not just a portfolio stabiliser for households; it is also the backbone of long‑term capital formation for India’s growth ambitions.Over the past few years, SEBI’s regulatory reforms such as the introduction of Online Bond Platform Providers (OBPPs), electronic bidding platforms, ₹10,000 min. face value for bonds, and improved disclosure standards have laid a strong foundation. However, to truly democratise bond investing and meaningfully increase retail participation, the Union Budget 2026 presents an important opportunity to address a few structural bottlenecks for Indian investors.1. Rationalise TDS on Bond Interest Income (Coupon)The introduction of Tax Deducted at Source (TDS) on bond interest income in Union Budget 2023 has unintentionally added friction for retail investors. While the intent was to improve tax compliance, the outcome has been increased complexity in return calculations (XIRR) and cash‑flow mismatches for investors. There was no TDS on interest from listed corporate bonds from 2008 to 2023.Unlike fixed deposits, bond investments often involve secondary market trades, accrued interest adjustments, and varying holding periods. The application of TDS in such cases makes it harder for investors to assess their actual post‑tax returns and increases the operational burden of reconciliation while filing their ITR or writing to companies directly for deductions due via 15G/15H forms.Removing TDS on bond interest income would simplify the investment process, improve transparency in yield computation, and encourage investors without compromising tax collection, as interest income would continue to be fully taxable at the time of filing returns.2. Introduce a Fair and Predictable Tax Regime for Bond InterestCurrently, interest earned from bonds is taxed at the investor’s applicable slab rate, unlike equities where a clear distinction exists between short‑term and long‑term capital gains with concessional tax rates. In fact, tax on interest from bond investments at slab rate may be even higher than those paid on debt mutual funds at flat 20% This creates an uneven playing field and could discourage long‑term participation in corporate bonds. For many retail investors earning annual returns in the range of 7–12%, slab‑rate taxation significantly erodes post‑tax outcomes, making bonds appear less attractive despite their lower volatility and capital preservation characteristics.A simplified and predictable tax framework—such as a flat tax rate of around 20% on bond interest income would bring parity across asset classes. This would encourage households to allocate more savings to bonds, support long‑term investing behaviour, and help channel domestic capital into India’s growing economy.3. Create a Uniform Distribution Framework for BondsWhile mutual funds, equities and insurance products operate under well‑defined, standardised distribution frameworks, bond distribution in India remains fragmented across multiple participant types and channels. This lack of uniformity limits scalability, restricts investor trust, and creates uncertainty for intermediaries.A clear, regulator‑approved distribution framework for corporate bonds—similar to the Authorised Person (AP) structure in equities and AMFI Registration Numbers (ARNs) in mutual funds—can help enforce fit‑and‑proper criteria, define roles and accountability, and standardise disclosure and suitability practices across the industry.4. Flattening of the Government Bond yield curveFor effective transmission of rate cuts by RBI into the economy, flattening of the government bond yield curve is essential. Post RBI rate cuts last year of 125 bps, the 10y bond has barely moved 20bps lower and in fact yields on 15y bonds have moved higher. A lot of this is due to technical supply and deteriorating sentiment due to a weakening rupee. Achievement around fiscal deficit numbers and the government’s future borrowing program would bring the confidence in markets on the longer end of the bond curve and bring yields down. Financial prudence will be closely watched at the budget to encourage the bond market.Union Budget 2026 has the opportunity to send a strong signal: that bonds are not just institutional instruments, but a core part of India’s household investment landscape. Enabling this shift will be critical as India moves towards its next phase of economic growth – Viksit Bharat 2047.(Vishal Goenka is Co‑Founder, IndiaBonds)
