For years, interest on listed NCDs held in demat form was paid to you without any tax deducted. That changed from FY 2023-24. Here is what applies now, and why the deducted amount is not the end of the story.

General information, not tax advice. Rates and thresholds are revised periodically. Confirm the current numbers for your assessment year with a qualified adviser.

What changed

The Finance Act 2023 removed the exemption that had shielded interest on listed securities held in dematerialised form from TDS. From FY 2023-24 onward, the issuer or registrar deducts tax at source on NCD interest before paying it to you, once the interest crosses the applicable threshold for the year.

The deduction is made at the prescribed rate for interest on securities. If you have not provided a valid PAN, a higher rate applies.

TDS is not your final tax

This is the point that costs people money. TDS is an advance against your total tax liability, not a settlement of it.

If tax is deducted at, say, 10% and you are in the 30% slab, you still owe the remaining amount on that interest. You pay the balance through advance tax during the year or as self-assessment tax when you file. Treating the TDS as "tax paid, nothing more to do" leaves a shortfall that attracts interest under sections 234B and 234C.

The reverse also applies. If your total income is below the taxable limit, you should not have tax deducted at all, and if it was, you claim it back as a refund when you file your return. The whole deducted amount comes back, but only after you file.

Preventing over-deduction: Form 15G and 15H

If your total income for the year will fall below the exemption limit, you can ask the issuer or registrar not to deduct TDS by submitting:

  • Form 15G, if you are below 60 and your total income is below the taxable limit.
  • Form 15H, if you are a senior citizen aged 60 or above, subject to the conditions for that form.

These must reach the deductor before the interest is paid. A form submitted after the coupon date does nothing for that payment, and you are back to claiming a refund on filing.

Submit the form for each financial year, to each issuer whose bonds you hold. It is not a one-time declaration.

Claiming credit for TDS deducted

The tax deducted appears in your Form 26AS and in the Annual Information Statement. When you file your return, you report the gross interest as income and claim credit for the TDS shown. The two net off against your computed liability, producing either a balance payable or a refund.

Reconcile the interest in your bank statements against Form 26AS before filing. Errors in TDS reporting by issuers do happen, and it is easier to get them corrected before you file than after.

What this does to your return

TDS does not change how much tax you ultimately pay. Your slab rate sets that regardless. It changes the timing. Some of the tax now leaves before the coupon reaches your account, rather than all of it at advance-tax dates.

For return calculations, this means nothing new. You were always going to pay slab-rate tax on the interest. The NCD returns calculator applies the slab to show the post-tax figure, which is the number that matters whether the tax is collected by TDS or by advance tax.

The takeaway

  • TDS on listed NCD interest applies from FY 2023-24. The old demat exemption is gone.
  • It is an advance, not a final tax. Higher slabs still owe the balance, lower incomes claim a refund.
  • File Form 15G or 15H before the coupon date if your income is below the taxable limit.
  • Reconcile against Form 26AS before filing and claim the credit there.

The broader tax picture, interest versus capital gains, tax-free bonds, cumulative NCDs, is in tax on corporate bonds and NCDs.