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Buying & Selling of Bonds: Everything You Should Know

Buying & Selling of Bonds: Everything You Should Know

Buying and selling of bonds is accessible through primary public issues, secondary markets, or from the exchange (NSE / BSE). Government bonds with taxation rates are available on RBI’s Retail Direct Gilt site. Here are the key points of buying and selling bonds.

How bonds are taxed:

Bonds are either interest or capital gains.

  • Under Interest

Buying bonds is indirectly loaning money to the government or issuer. The issuer uses the money to make returns and pay back the bond’s par value at maturity with periodic interest. Many bonds have interest rates according to their lifespan, either semi-annual or annually. 

The interest generated by the bond and the ordinary interest, such as wages, salaries, and bonuses, carry equal tax rates. Thus, taxpayers in the 37% tax brackets will pay a 37% tax on their interest. However, Uncle Sam may tax or leave the interest tax-free on rare occasions.

  • Under Capital gains

If you buy a new bond and leave it until maturity, there will be no capital gain or loss. If you leave a bond to exhaust its lifespan, the interest will be considered a return on your principal or initial investment. Stocks and bonds trade on the same financial exchanges and attract capital gain or loss; suppose you give them up before maturity. The calculation is based on the difference between the original and current prices. In addition, bond funds face loss and gain when the manager buys or sells the fund’s securities. 

In essence, the interest from selling a bond is capital gain and is taxable under different rates based on; short-term capital gain, which covers a bond held for 365 days or a year with an ordinary income tax rate, or long-term capital gain, which exceeds more than 365 days or a year. The long-term capital gains keep your tax rates between 0% and 20% based on your filing method and income. 

Types of Bond Tax

Government Bonds

The interest on treasury bills, bonds, and notes is under the federal tax level, not the state or local. In addition, some US government agency securities are subject to federal tax but not state or local tax. Some agency securities include Federal Home Loan Bank, Financing Corporation, Tennessee Valley Authority, etc. 

Taxation of Zero-Coupon Bonds

Zero coupon bonds have no rate, but the interest must be included as income, even though you’ll get the interest at maturity. This is because they are sold at a discount but retain their par value at maturity. Also, the interest is divided by the maturity years. Consequently, they are taxed at interest rates like ordinary discount bonds.

Savings Bonds

The government also offers public savings bonds. Savings bonds are investment portfolios with many benefits. Certain bonds like series E and EE are tax-free at local and state levels, and the federal tax level only works at maturity. Series H and HH have semi-annual taxes before maturity. Series I have taxable interest, and series E and I bonds are excluded from income tax if used to settle college tuition.

Municipal Bonds

High-income investors prefer investing in municipal bonds to reduce what is paid in taxes as investment income. However, the interest is tax-free at all levels only if the investor lives in the region or municipality as the provider. On the other hand, taxpayers that buy municipal bonds in the secondary market and sell them attract tax at ordinary long or short-term capital gain rates on the interest. But the rates are lower than other bonds.

Corporate Bonds

Corporate bonds are simple and taxable since they have the highest default risk attracting the highest interest rates. In essence, with 100 corporate bonds at a $1,000 face value and a 7% annual rate, a taxpayer will pay $7,000 annually.



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