How a bond works
When you buy a bond you lend money to the issuer. In return you get:
- Coupon — the interest, usually paid every six months or every year, as a percentage of the bond's face value.
- Maturity — the date the issuer repays the face value.
- Yield — your real return, which depends on the price you paid. Buy a bond below its face value and your yield is higher than the coupon; buy above and it is lower. Compare bonds by yield to maturity (YTM), not coupon.
The types at a glance
| Type | Issuer | Main risk | Interest |
|---|---|---|---|
| Government bonds | Central or state government | Interest-rate changes | Taxable |
| Corporate bonds | Companies, NBFCs, PSUs | Issuer default | Taxable |
| Tax-free bonds | Public sector companies | Low liquidity | Tax-free |
| Floating rate bonds | RBI / government, companies | Rate can fall | Taxable |
| 54EC capital gain bonds | REC, PFC, IRFC | 5-year lock-in | Taxable |
| Zero coupon bonds | Government, companies | Price swings | Paid at maturity |
| Sovereign gold bonds | Government of India | Gold price | 2.5% a year |
The three risks to understand
- Credit risk — the issuer may not pay. Government bonds carry practically none; a company's bond carries as much as its business. Credit ratings (AAA is highest, D is default) from SEBI-registered agencies help, but they can change.
- Interest-rate risk — when rates rise, existing bonds' prices fall, and the longer the bond, the bigger the fall. It only hurts if you sell before maturity.
- Liquidity risk — many bonds trade rarely, so you may not get a fair price if you need to sell early.
How bonds are taxed
Interest is added to your income and taxed at your slab rate (except tax-free bonds). Gains on listed bonds held more than 12 months are taxed at 12.5%; gains on unlisted bonds and debentures are taxed at your slab rate however long you hold them. The Income-tax Act, 2025 has applied since 1 April 2026 with new section numbers, but these rates carried over.
Bonds or a fixed deposit?
A bank fixed deposit is simpler: no market price, and up to ₹5 lakh per bank is insured by DICGC. Bonds can pay more and lock a rate for longer, but you take the issuer's risk and the price risk. Many people hold both. Start with how to invest in bonds.
For general information only, not investment advice or a recommendation. Oxon Fintech is a loan facilitation platform, not a SEBI-registered investment adviser, bank or mutual fund distributor, and does not sell bonds, deposits or funds. Rates and rules are as checked on the date above; confirm with the issuer, bank or fund house before investing. Mutual fund investments are subject to market risks; read all scheme-related documents carefully.