TL;DR — bonds, NPS, REITs in one table
Government bonds (G-Sec, treasury bills): Interest taxable in your hands; no TDS on holdings up to ₹10,000 of interest per FY (Section 193 threshold); above that, 10% TDS (resident) / Section 195 NRI default. Maturity capital gain (sale or redemption above issue price): 12.5% LTCG (>12 months) under Section 112 post-FA 2024.
Tax-free bonds (Section 10(15)(iv)): Interest fully exempt for all holders — NRI and resident alike. No TDS; declare in ITR-2 Schedule EI. Issued by REC, NHAI, IRFC, HUDCO, PFC, IIFCL, NABARD — specifically notified by Government. Capital gain on premature sale: 12.5% LTCG / slab STCG.
Corporate bonds / NCDs: Interest taxable; TDS at 10% (resident) per Section 193 / Section 195 NRI default. Capital gain on sale: same as govt bonds. NCD listed status determines secondary-market liquidity.
Perpetual bonds (Tier-1, Tier-2 bonds of banks): Treated as fixed-income for tax; interest taxable. Some grandfathering for AT-1 bonds depending on issue terms.
NPS (National Pension System) exit on superannuation: • 60% lumpsum → tax-free under Section 10(12A) • 40% mandatory annuity purchase → annuity income taxable in year of receipt at slab rate • Annuity from PFRDA-approved provider (HDFC Life, LIC, ICICI Pru Life, etc.)
NPS premature exit (before age 60): • 20% lumpsum (taxable) • 80% mandatory annuity (taxable) • Section 10(12A) exemption NOT available on premature exit
REITs / InvITs (Embassy, Mindspace, Brookfield, Nexus Select Trust, IndiGrid, etc.): • Distribution split into: (a) dividend component (taxable, no Sec 10(34)/10(35) since FA 2020); (b) interest component (taxable); (c) capital-return / repayment of debt component — post-Finance Act 2023, this reduces cost basis up to the unit's issue price; any cumulative excess over issue price is taxable as IOS under Section 56(2)(xii) • Resident: 10% TDS on distribution under Section 194LBA • NRI: Section 195 TDS, varies by component classification • Capital gain on sale (on stock exchange): Section 111A (≤12 months: 20% post-FA 2024) / Section 112A (>12 months: 12.5% above ₹1.25L)
Bonds — the spectrum from tax-free to fully taxable
Indian bonds for NRI investors split into several distinct tax buckets:
1. Tax-free bonds (Section 10(15)(iv)). These were issued primarily during 2013-2016 by Government-owned infrastructure entities (REC, NHAI, IRFC, HUDCO, PFC, IIFCL, NABARD) to fund infrastructure. The Government notified specific issues under Section 10(15)(iv) — interest is exempt in the holder's hands. Most have 10-15 year tenors and are now in their latter half. NRIs holding these enjoy the same exemption as residents.
• Interest: exempt; no TDS; declare in ITR-2 Schedule EI • Maturity: principal returned; no capital gain (issued at face value, redeemed at face value) • Premature sale on exchange: capital gain taxed at 12.5% LTCG / slab STCG
2. Sovereign bonds (G-Sec, treasury bills, state development loans): Interest fully taxable as IOS. No TDS on holdings up to ₹10,000 interest per FY (Section 193 threshold for resident); above that, 10% TDS. For NRIs, Section 195 applies on the interest, but RBI doesn't typically deduct TDS on its own secondary-market issuances. Practical position: declare in ITR-2 IOS schedule.
• Some G-Secs offer DTAA treaty rates (Article 11 — interest) — typically 10-15% cap • Floating Rate Bonds (FRSB 2020) and similar: similar treatment
3. Corporate bonds (listed, NCDs): Issued by Indian companies — Reliance, Tata, L&T, HDFC, ICICI, etc. Interest fully taxable; 10% TDS at source under Section 193 for residents. For NRIs, Section 195 applies — issuer / RTA deducts at 30%+ default unless treaty rate documented via Form 10F/41 + TRC.
• DTAA reduces NRI TDS on interest to typically 10%-15% per treaty Article 11 • Capital gain on sale: 12.5% LTCG (>12 months) per Section 112 • Convertible debentures (CCDs / OCDs) — convertible into equity — have additional rules on the equity conversion event
4. Tax-saving / 54EC bonds (REC / NHAI / IRFC / PFC): Issued specifically for Section 54EC capital-gain exemption. NRIs CAN invest (subject to RBI's specific eligibility per tranche). Lock-in 5 years. Interest fully taxable at slab rate; no TDS at source typically. Capital amount on maturity is the original investment (no gain).
5. Perpetual / AT-1 bonds (Yes Bank AT-1 saga of 2020): These are perpetual (no maturity), with call options at year 5 / 10. Interest taxable as IOS. Bank-issued AT-1 are write-down sensitive — Yes Bank AT-1 holders saw 100% write-down in March 2020. NRI investors should treat AT-1 as quasi-equity for risk purposes.
6. Foreign currency bonds (Masala bonds, ECB-route bonds): Subject to Section 194LD or Section 194LC concessional 5% TDS in some cases. Complex; NRI participation in Masala bonds is rare retail.
NPS — the 60/40 exit and the Tier I vs Tier II distinction
The National Pension System (NPS) is a defined-contribution pension scheme regulated by the Pension Fund Regulatory and Development Authority (PFRDA). NRIs can subscribe to NPS Tier I; Tier II is restricted in some cases.
Tier I — the main pension account:
• Contributions during accumulation phase: eligible for Section 80CCD(1) (own contribution, up to 10% of salary) + Section 80CCD(1B) (additional ₹50,000 over 80C limit) + Section 80CCD(2) (employer contribution, up to 14% of basic + DA for central govt / 10% for others) • Withdrawal at superannuation (age 60 or extended to 70 on opt-in): - 60% lumpsum → tax-free under Section 10(12A) for the entire amount - 40% mandatory annuity from PFRDA-approved provider (HDFC Life, LIC, ICICI Pru Life, SBI Life, Star Union Dai-ichi, etc.) — annuity payments taxable as pension in year of receipt at slab rate
Tier II — voluntary savings:
• Contributions: not eligible for 80C / 80CCD deduction (unless Central Govt employee under specific scheme) • Withdrawals: anytime, taxable as IOS at slab rate (no concessional rate) • Used as a tax-advantaged savings account by some, though tax efficiency limited
Premature exit (before age 60):
• 20% lumpsum (taxable as IOS) + 80% mandatory annuity from approved provider • Section 10(12A) does NOT apply to premature exit • Effectively forces partial annuitization even on premature exit
Partial withdrawal during service (Tier I):
• Permitted up to 25% of own contributions (NOT employer's) for specific purposes — higher education, children's marriage, home purchase, medical emergency, skill development • Max 3 partial withdrawals during the account's lifetime • Tax-free under Section 10(12B) — exempt withdrawal
NRI specifics:
• NRIs can subscribe to NPS Tier I via online (eNPS at npscra.nsdl.co.in) • Contributions can be from NRO or NRE source; tax-deductions follow the same rules • On returning to India (becoming Resident), the NPS account continues seamlessly • On permanent exit from India (renunciation of citizenship, etc.), specific PFRDA exit rules apply — typically full lumpsum payout possible with foreign-residency proof • Annuity from PFRDA-approved providers may not be repatriable; check with the provider
The OPS vs NPS distinction: Pre-2004 central government employees are under Old Pension Scheme (OPS) — defined benefit, fully tax-free pension. Post-2004 new recruits are under NPS — defined contribution as above. NRIs are typically under NPS (private subscribers) or OPS-equivalent if formerly in pre-2004 central government service.
REITs and InvITs — the component-level taxation
REITs (Real Estate Investment Trusts) and InvITs (Infrastructure Investment Trusts) are SEBI-regulated entities that pool investor capital to invest in income-producing real estate (REITs) or infrastructure (InvITs). They pay periodic distributions to unitholders.
Major Indian REITs (FY 2026): Embassy Office Parks REIT, Mindspace Business Parks REIT, Brookfield India REIT, Nexus Select Trust REIT. InvITs include IndiGrid, India Grid Trust, IRB InvIT.
The distribution structure (per Section 115UA):
REITs / InvITs are 'pass-through' entities for tax — the underlying income (rent, interest, dividends from SPVs) is taxed at the unitholder level, not at the trust level. Each periodic distribution is split into three components:
1. Dividend component: Distributions originating from SPV dividends. Post-FA 2020 (when Section 10(34) dividend exemption ended), this is taxable in the unitholder's hands. Resident: 10% TDS under Section 194 (if exceeding threshold). NRI: 20% TDS under Section 195; reduced to 10%-15% under most DTAAs.
2. Interest component: Distributions originating from SPV interest income. Fully taxable. Resident: 10% TDS under Section 194LBA. NRI: Section 195 — 30% default, reduced under DTAA Article 11 typically to 10%-15%.
3. Capital-return / repayment of debt component: Post-Finance Act 2023 (Section 56(2)(xii)), this reduces the unitholder's cost basis until cumulative repayments equal the unit's issue price; cumulative repayments in excess of issue price become taxable as Income from Other Sources. Resident: 10% TDS under Section 194LBA on the distributed amount; NRI: Section 195 TDS as applicable.
REIT distributions on Form 26AS / AIS:
• REIT issues quarterly/half-yearly distributions • Each distribution comes with a 'tax statement' showing the component split • Form 26AS / AIS reflects the TDS deducted by the REIT • Unitholder reports each component in respective ITR-2 schedules
Capital gain on REIT / InvIT unit sale:
• REIT / InvIT units listed on stock exchanges — covered by Section 111A (STCG ≤12 months: 20% post-FA 2024) and Section 112A (LTCG >12 months: 12.5% above ₹1.25L) • Same as listed equity for capital gains purposes • Broker TDS at source on sale
Recent regulatory developments:
• Finance Act 2023 introduced Section 56(2)(xii) — the previously non-taxable “capital-return / repayment of debt” component of REIT/InvIT distributions now reduces cost basis up to the unit's issue price; any cumulative excess over issue price becomes taxable as IOS in the unitholder's hands. Pre-FA 2023 the component was entirely non-taxable. • SEBI's REIT Regulations 2014 (as amended) govern distributions and disclosures • Tax treatment continues to evolve; check current FY rules for any updates
NRI REIT investment via PIS:
• Like other listed securities, REIT / InvIT units bought through NRI's PIS account • Distributions credited to PIS-NRO (since the underlying is Indian-source income) • Repatriation subject to USD 1M/FY NRO cap on capital balances; current distributions repatriable after tax
Worked example — diversified NRI portfolio across all three asset classes
Concrete numbers. Consider Rohit, a Singapore NRI with a diversified Indian portfolio in FY 2026-27:
Holdings: • REC tax-free bonds (8.46% issue): ₹10,00,000 face value, paying ~₹84,600 interest • HDFC NCD (9.5% issue): ₹5,00,000 face value, paying ~₹47,500 interest • G-Sec 7.10% 2034: ₹2,00,000 face value, paying ~₹14,200 interest • Embassy REIT: 2,000 units. Q1-Q4 distributions = ₹2,800 (dividend) + ₹3,200 (interest) + ₹4,500 (capital return) = ₹10,500 total • NPS Tier I balance: ₹12,00,000 (not exiting this year — still accumulating)
Tax computation FY 2026-27:
*REC tax-free bonds (₹84,600 interest):* • Section 10(15)(iv) → fully exempt • Reported on ITR-2 Schedule EI • Indian tax: zero
*HDFC NCD (₹47,500 interest):* • Taxable as IOS • HDFC Trustees (RTA) deducts at default Section 195 rate; assuming Rohit furnished PAN + TRC + Form 41 for Singapore DTAA: rate 15% (India-Singapore DTAA Article 11 cap) • TDS: ₹47,500 × 15% = ₹7,125 (includes cess — treaty rate is inclusive) • Rohit's slab tax in ITR-2: ₹47,500 × 15% = ₹7,125 (matches; no additional liability or refund)
*G-Sec interest (₹14,200):* • Taxable IOS • Below Section 193 ₹10,000 threshold per FY per source — typically no TDS • Rohit declares; slab tax ₹14,200 × treaty rate 15% = ₹2,130; self-assessment via ITR
*Embassy REIT distributions (₹10,500 total):* • ₹2,800 dividend → taxable; India-Singapore DTAA Article 10: 10% applies only where the beneficial owner is a company owning ≥25% of payer's capital — for an individual portfolio holder like Rohit, the “all other cases” treaty rate of 15% applies → TDS ₹420 • ₹3,200 interest → taxable; treaty rate 15% → TDS ₹480 • ₹4,500 capital return / repayment of debt → post-FA 2023, reduces Rohit's cost basis in the units; if cumulative returns of capital remain within his original issue price, no current taxable event (basis adjustment only) • Total REIT TDS at source on income components: ₹900 • Capital-return tracking carried forward; any cumulative excess over issue price becomes IOS-taxable under Section 56(2)(xii)
*Total Indian tax for FY:* • ~₹7,125 + ₹2,130 + ₹900 = ~₹10,155 • All from non-equity income; LTCG / STCG exemption doesn't apply
*Singapore tax position (FY 2026 for Rohit as Singapore tax resident):* • Singapore territorial taxation • Foreign-source income (Indian) generally not taxable in Singapore IF not remitted • If Rohit keeps funds in NRO / NRE: no Singapore tax • If remitted to Singapore: may become Singapore-chargeable; FTC for Indian tax
*Reporting:* • ITR-2 (India) with Schedule EI (tax-free bond interest), IOS (NCD + G-Sec), CG (REIT capital-return as cost-basis adjustment), Treaty rate documentation • Singapore Form B1 (if Resident) showing foreign-source income; non-remittance basis preserves non-taxability
The lesson: A diversified bonds + REIT NRI portfolio generates modest tax liability — the tax-free bonds provide structural alpha, the treaty rates compress NCD / dividend / interest TDS, and the REIT capital-return / repayment-of-debt component is only taxable once cumulative repayments exceed the unit's issue price (Section 56(2)(xii), post-FA 2023). Total Indian tax bite on this ₹17.5L portfolio is ~₹10K (well under 0.1% effective rate). The right portfolio construction makes Indian-bond exposure tax-efficient even before considering home-country FTC.