Tax on US bond income for Indian residents
Indian investors are steadily adding US bonds to their portfolios. Treasury bonds, corporate bonds, and municipal bonds all promise steady dollar-denominated returns. But few investors fully understand how the US bond income tax India rules apply to their earnings.
India taxes its residents on worldwide income. Every dollar of bond interest or capital gain must be reported and taxed in India. The rules changed significantly after the July 2024 amendments. Here is what you need to know for FY 2025-26.
How interest income from US bonds is taxed
Interest earned on any US bond falls under "Income from Other Sources" (Section 56) of the Income Tax Act, 1961. India does not distinguish treasury bond interest tax, India rules, and those for corporate or municipal bonds. All three types are subject tothe same slab rates.
You must convert bond interest to INR using the SBI TT Buying Rate on the last day of the month before receipt. This converted amount gets added to your gross total income.
Under the new tax regime (Section 115BAC) for FY 2025-26, tax slabs range from nil on income up to ₹4 lakh to 30% on income above ₹24 lakh. A 4% Health and Education Cess applies on top. The Section 87A rebate makes income up to ₹12 lakh effectively tax-free under the new regime.
The old regime retains the ₹2.5 lakh basic exemption with rates of 5%, 20%, and 30%. Most bond investors benefit more from the new regime because of its lower slab rates and higher rebate threshold. No special concessional rate or indexation adjustment exists for foreign bond interest.
US withholding tax on bond interest.
The default US withholding rate on interest paid to non-resident aliens is 30%. However, most Indian investors pay zero thanks to powerful statutory exemptions.
Treasury bond interest is exempt from US withholding under IRC §871(i). No treaty claim is needed. The exemption applies automatically once you file a valid Form W-8BEN with your US broker. This makes treasury bond interest in India a single-layer obligation—you pay only in India.
Corporate bond interest qualifies for the portfolio interest exemption under IRC §871(h). The bond must be in registered form, and you must own less than 10% of the issuer's voting stock. Nearly all Indian retail investors meet these conditions and pay 0% US withholding.
Municipal bond interest is exempt under IRC §103 for all persons regardless of nationality. No withholding applies from the US side.
Without a valid W-8BEN on file, your broker will withhold the full 30% by default. The form requires your PAN and your Indian residency claim and remains valid for three years. Always keep it current to avoid unnecessary withholding.
Capital gains on bond sales — Section 50AA changed everything
This is the biggest shift for Indian bond investors. The Finance (No. 2) Act, 2024, effective 23 July 2024, expanded Section 50AA to cover unlisted bonds and debentures. US bonds are not listed on any recognised Indian stock exchange. They are classified as unlisted securities.
All gains from selling, redeeming, or maturing US bonds are now deemed short-term capital gains. The holding period does not matter. Whether you held a bond for six months or six years, the gain is taxed at your income slab rate.
Before this amendment, unlisted bonds held for over 36 months qualified for long-term capital gains at 20% with indexation. That benefit is entirely gone. No indexation adjustment is available. The gain equals your sale proceeds in INR minus your acquisition cost in INR minus transfer expenses.
You can set off these deemed short-term capital gains against both short-term and long-term capital losses. Unabsorbed losses carry forward for eight assessment years. Finance Act 2025 made no further changes to this framework.
For a broader overview, read about the tax implications for Indian residents investing in the US market.
The distinction between bond capital gains vs interest remains important: interest is Income from Other Sources, while sale profits are Capital Gains — but both face slab-rate taxation.
Treasury vs corporate bonds — the real difference is on the US side
From India's perspective, Treasury and corporate bonds receive identical tax treatment. Interest is taxed at slab rates. Capital gains are deemed short-term under Section 50AA. No preferential rate or exemption exists for foreign government securities.
The meaningful difference lies on the US side. Treasury bond interest relies on a statutory exclusion (IRC §871(i)) with no conditions beyond your non-resident status. Corporate bond interest is subject to the portfolio interest exemption (IRC §871(h)), which imposes specific ownership percentage and bond registration requirements.
If any portfolio interest condition is not met for a corporate bond, the interest is subject to a 30% default withholding. The India-US DTAA would then cap this at 15%. For Treasury bonds, no such risk exists. This makes US Treasuries slightly more straightforward from a compliance standpoint.
Are US municipal bonds tax-free for Indian investors?
This is a common and costly misconception. US municipal bonds enjoy tax-exempt status under IRC §103. But that exemption applies only to US domestic provisions. India does not recognise it.
An Indian resident holding US municipal bonds must declare the full interest as Income from Other Sources. You pay tax at your applicable slab rate — identical to Treasury or corporate bond interest.
The situation is actually worse than other bond types. Because the US does not withhold any tax on municipal bond interest, there is no foreign tax credit available. An investor in the 30% bracket pays the full 30% plus cess with no relief from either country. This makes US municipal bonds arguably the least tax-efficient bond type for Indian residents. The label "municipal bond tax-free India" simply does not apply.
What is Original Issue Discount, and how is it taxed?
Original Issue Discount (OID) is the difference between a bond's face value at maturity and its lower issue price. Zero-coupon bonds represent the extreme case where the entire return is OID. The tax treatment of original issue discount bonds requires careful attention from Indian investors.
In the US, OID accrues annually under the constant-yield method. The portfolio interest exemption explicitly covers OID. Indian investors with a valid W-8BEN pay 0% US tax on OID from qualifying portfolio debt.
Under Indian tax law, OID is economically equivalent to deferred interest. It falls under the broad definition of "interest" in Section 2(28A) of the Income Tax Act. You report it as Income from Other Sources at slab rates. When you sell an OID bond before maturity, the accrued OID portion is treated as interest. Any additional market appreciation may constitute capital gains under Section 50AA.
DTAA provisions for interest income
The India-US Double Taxation Avoidance Agreement provides important safeguards against double taxation. Article 11 governs interest income specifically.
Article 11(1) gives India, as the residence state, primary taxing rights on interest. Article 11(2) allows the US also to tax, but caps the rate at 15% for general interest and 10% for bank loans. Article 11(3) fully exempts government-to-government interest. The DTAA's interest definition in Article 11(4) is broad enough to cover bonds, debentures, premiums, and OID.
In practice, US domestic law already provides a 0% withholding through the portfolio interest exemption and the Treasury interest exclusion. The DTAA's 15% cap functions only as a backstop. It becomes relevant only when the portfolio interest exemption fails — for instance, if you hold more than 10% of a corporate issuer's stock.
To claim DTAA benefits, file Form W-8BEN with your US broker. Specify India as your residence country and cite Article 11. Include your PAN. Under Article 1(2), the treaty does not restrict more favourable treatment under domestic law. So the 0% domestic exemption prevails over the 15% DTAA cap.
Reporting US bond income in your ITR
Indian residents with US bond holdings must use ITR-2 or ITR-3. Never use ITR-1 or ITR-4, as they do not include Schedule FA for foreign asset disclosure.
Schedule FA requires disclosure of all foreign assets held at any point during the calendar year ending 31 December. Report your US bonds under Table B with details including institution name, account number, country, peak value, and income earned.
Schedule FSI breaks down foreign income by country and type. Report interest under Income from Other Sources. Report capital gains under Capital Gains. Record the tax paid outside India on each income stream.
Schedule TR summarises your foreign tax credit claim. Specify the country, tax identification number, and relief amount under Section 90. File Form 67 online before the end of the assessment year to claim the credit.
Winvesta's guide to handling US stock taxation in India walks you through the process step by step.
Attach your US Form 1042-S or equivalent proof of foreign tax paid.
Penalties for non-disclosure are severe. Under the Black Money Act, 2015, failure to report foreign assets in Schedule FA attracts a penalty of ₹10 lakh per assessment year. A Finance Act 2024 relaxation exempts this penalty where total foreign movable assets do not exceed ₹20 lakh. Budget 2026 introduced the FAST-DS scheme — a six-month window for small taxpayers to disclose previously unreported foreign assets.
Understanding the US bond income tax rules in India helps protect you from penalties and helps you plan more effectively. Keep your W-8BEN current, report every holding in Schedule FA, and claim your foreign tax credit through Form 67. With the New Income Tax Act taking effect from April 2026, now is the right time to get your foreign bond compliance in order.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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Table of Contents
Indian investors are steadily adding US bonds to their portfolios. Treasury bonds, corporate bonds, and municipal bonds all promise steady dollar-denominated returns. But few investors fully understand how the US bond income tax India rules apply to their earnings.
India taxes its residents on worldwide income. Every dollar of bond interest or capital gain must be reported and taxed in India. The rules changed significantly after the July 2024 amendments. Here is what you need to know for FY 2025-26.
How interest income from US bonds is taxed
Interest earned on any US bond falls under "Income from Other Sources" (Section 56) of the Income Tax Act, 1961. India does not distinguish treasury bond interest tax, India rules, and those for corporate or municipal bonds. All three types are subject tothe same slab rates.
You must convert bond interest to INR using the SBI TT Buying Rate on the last day of the month before receipt. This converted amount gets added to your gross total income.
Under the new tax regime (Section 115BAC) for FY 2025-26, tax slabs range from nil on income up to ₹4 lakh to 30% on income above ₹24 lakh. A 4% Health and Education Cess applies on top. The Section 87A rebate makes income up to ₹12 lakh effectively tax-free under the new regime.
The old regime retains the ₹2.5 lakh basic exemption with rates of 5%, 20%, and 30%. Most bond investors benefit more from the new regime because of its lower slab rates and higher rebate threshold. No special concessional rate or indexation adjustment exists for foreign bond interest.
US withholding tax on bond interest.
The default US withholding rate on interest paid to non-resident aliens is 30%. However, most Indian investors pay zero thanks to powerful statutory exemptions.
Treasury bond interest is exempt from US withholding under IRC §871(i). No treaty claim is needed. The exemption applies automatically once you file a valid Form W-8BEN with your US broker. This makes treasury bond interest in India a single-layer obligation—you pay only in India.
Corporate bond interest qualifies for the portfolio interest exemption under IRC §871(h). The bond must be in registered form, and you must own less than 10% of the issuer's voting stock. Nearly all Indian retail investors meet these conditions and pay 0% US withholding.
Municipal bond interest is exempt under IRC §103 for all persons regardless of nationality. No withholding applies from the US side.
Without a valid W-8BEN on file, your broker will withhold the full 30% by default. The form requires your PAN and your Indian residency claim and remains valid for three years. Always keep it current to avoid unnecessary withholding.
Capital gains on bond sales — Section 50AA changed everything
This is the biggest shift for Indian bond investors. The Finance (No. 2) Act, 2024, effective 23 July 2024, expanded Section 50AA to cover unlisted bonds and debentures. US bonds are not listed on any recognised Indian stock exchange. They are classified as unlisted securities.
All gains from selling, redeeming, or maturing US bonds are now deemed short-term capital gains. The holding period does not matter. Whether you held a bond for six months or six years, the gain is taxed at your income slab rate.
Before this amendment, unlisted bonds held for over 36 months qualified for long-term capital gains at 20% with indexation. That benefit is entirely gone. No indexation adjustment is available. The gain equals your sale proceeds in INR minus your acquisition cost in INR minus transfer expenses.
You can set off these deemed short-term capital gains against both short-term and long-term capital losses. Unabsorbed losses carry forward for eight assessment years. Finance Act 2025 made no further changes to this framework.
For a broader overview, read about the tax implications for Indian residents investing in the US market.
The distinction between bond capital gains vs interest remains important: interest is Income from Other Sources, while sale profits are Capital Gains — but both face slab-rate taxation.
Treasury vs corporate bonds — the real difference is on the US side
From India's perspective, Treasury and corporate bonds receive identical tax treatment. Interest is taxed at slab rates. Capital gains are deemed short-term under Section 50AA. No preferential rate or exemption exists for foreign government securities.
The meaningful difference lies on the US side. Treasury bond interest relies on a statutory exclusion (IRC §871(i)) with no conditions beyond your non-resident status. Corporate bond interest is subject to the portfolio interest exemption (IRC §871(h)), which imposes specific ownership percentage and bond registration requirements.
If any portfolio interest condition is not met for a corporate bond, the interest is subject to a 30% default withholding. The India-US DTAA would then cap this at 15%. For Treasury bonds, no such risk exists. This makes US Treasuries slightly more straightforward from a compliance standpoint.
Are US municipal bonds tax-free for Indian investors?
This is a common and costly misconception. US municipal bonds enjoy tax-exempt status under IRC §103. But that exemption applies only to US domestic provisions. India does not recognise it.
An Indian resident holding US municipal bonds must declare the full interest as Income from Other Sources. You pay tax at your applicable slab rate — identical to Treasury or corporate bond interest.
The situation is actually worse than other bond types. Because the US does not withhold any tax on municipal bond interest, there is no foreign tax credit available. An investor in the 30% bracket pays the full 30% plus cess with no relief from either country. This makes US municipal bonds arguably the least tax-efficient bond type for Indian residents. The label "municipal bond tax-free India" simply does not apply.
What is Original Issue Discount, and how is it taxed?
Original Issue Discount (OID) is the difference between a bond's face value at maturity and its lower issue price. Zero-coupon bonds represent the extreme case where the entire return is OID. The tax treatment of original issue discount bonds requires careful attention from Indian investors.
In the US, OID accrues annually under the constant-yield method. The portfolio interest exemption explicitly covers OID. Indian investors with a valid W-8BEN pay 0% US tax on OID from qualifying portfolio debt.
Under Indian tax law, OID is economically equivalent to deferred interest. It falls under the broad definition of "interest" in Section 2(28A) of the Income Tax Act. You report it as Income from Other Sources at slab rates. When you sell an OID bond before maturity, the accrued OID portion is treated as interest. Any additional market appreciation may constitute capital gains under Section 50AA.
DTAA provisions for interest income
The India-US Double Taxation Avoidance Agreement provides important safeguards against double taxation. Article 11 governs interest income specifically.
Article 11(1) gives India, as the residence state, primary taxing rights on interest. Article 11(2) allows the US also to tax, but caps the rate at 15% for general interest and 10% for bank loans. Article 11(3) fully exempts government-to-government interest. The DTAA's interest definition in Article 11(4) is broad enough to cover bonds, debentures, premiums, and OID.
In practice, US domestic law already provides a 0% withholding through the portfolio interest exemption and the Treasury interest exclusion. The DTAA's 15% cap functions only as a backstop. It becomes relevant only when the portfolio interest exemption fails — for instance, if you hold more than 10% of a corporate issuer's stock.
To claim DTAA benefits, file Form W-8BEN with your US broker. Specify India as your residence country and cite Article 11. Include your PAN. Under Article 1(2), the treaty does not restrict more favourable treatment under domestic law. So the 0% domestic exemption prevails over the 15% DTAA cap.
Reporting US bond income in your ITR
Indian residents with US bond holdings must use ITR-2 or ITR-3. Never use ITR-1 or ITR-4, as they do not include Schedule FA for foreign asset disclosure.
Schedule FA requires disclosure of all foreign assets held at any point during the calendar year ending 31 December. Report your US bonds under Table B with details including institution name, account number, country, peak value, and income earned.
Schedule FSI breaks down foreign income by country and type. Report interest under Income from Other Sources. Report capital gains under Capital Gains. Record the tax paid outside India on each income stream.
Schedule TR summarises your foreign tax credit claim. Specify the country, tax identification number, and relief amount under Section 90. File Form 67 online before the end of the assessment year to claim the credit.
Winvesta's guide to handling US stock taxation in India walks you through the process step by step.
Attach your US Form 1042-S or equivalent proof of foreign tax paid.
Penalties for non-disclosure are severe. Under the Black Money Act, 2015, failure to report foreign assets in Schedule FA attracts a penalty of ₹10 lakh per assessment year. A Finance Act 2024 relaxation exempts this penalty where total foreign movable assets do not exceed ₹20 lakh. Budget 2026 introduced the FAST-DS scheme — a six-month window for small taxpayers to disclose previously unreported foreign assets.
Understanding the US bond income tax rules in India helps protect you from penalties and helps you plan more effectively. Keep your W-8BEN current, report every holding in Schedule FA, and claim your foreign tax credit through Form 67. With the New Income Tax Act taking effect from April 2026, now is the right time to get your foreign bond compliance in order.
Disclaimer: The views and recommendations made above are those of individual analysts or brokerage companies, and not of Winvesta. We advise investors to check with certified experts before making any investment decisions.
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Invest in 11,000+ US stocks & ETFs
