FRB 2028 Interest Rate 6.45% Oct 2026 - Income Tax Implications

What Happened?

The Government of India Floating Rate Bond 2028 (FRB 2028) will carry an interest rate of 6.45 per cent per annum for the half-year period from October 04, 2026 to April 03, 2027. This floating rate is calculated by adding a fixed spread of 0.64% to the average Weighted Average Yield (WAY) of the last three auctions of 182-Day Treasury Bills as on the rate-fixing date of October 04, 2026. This announcement is crucial for investors holding or planning to invest in government securities, as it impacts their income tax liability and investment returns during Assessment Year 2026-27.

Background & Legal Context

Income from Government Securities under Income Tax Act 2025:

Interest income earned from Government of India securities, including Floating Rate Bonds, is treated as income from other sources under Section 56 of the Income Tax Act 2025 (previously Section 56 of the 1961 Act also covered this). The key legal provisions that apply to FRB 2028 investors are:

• Section 193 - Tax Deducted at Source (TDS): Banks and financial institutions acting as coupon payment agents must deduct TDS at the rate of 10% on interest income from government securities when the interest amount exceeds ₹5,000 in a financial year. However, different rates may apply based on the residential status of the investor and applicable tax treaties.
• Section 56 - Income from Other Sources: All interest received on FRB 2028 must be reported as income under this section for the financial year in which it is received. For AY 2026-27, the first coupon payment (October 2026 to April 2027) will be taxable in FY 2026-27.
• Section 80TTA & 80TTB: Senior citizens above 60 years can claim a deduction on interest income from savings accounts up to ₹50,000, but interest from government securities like FRB 2028 does not qualify for these deductions.
• Section 94(7) - Securities Transaction Tax: While FRB 2028 held to maturity attracts no STT, secondary market sales may be subject to Securities Transaction Tax if applicable.

Indexation Benefit: Unlike bonds held through open market purchases, government securities issued directly by RBI do not qualify for indexation benefit under Section 48 for computing long-term capital gains.

What Does This Mean for You?

For Individual Investors:

If you hold FRB 2028 bonds, the 6.45% interest rate announced for H1 FY 2026-27 will be credited to your account after TDS deduction. Your net return after 10% TDS will be approximately 5.805% per annum (before considering the applicable tax slab rate). The actual tax burden depends on your income tax slab:

• No Tax Slab: You will receive the full 6.45% if your total income does not attract any tax. You can file ITR to claim a refund of TDS deducted.
• 20% Tax Slab: Your effective cost of this investment will be higher than the net after-TDS amount, as the interest will be added to your total income for computing tax liability.
• 30% Tax Slab: High-income earners will bear a higher tax burden, and the effective return reduces significantly.

For Corporate Investors:

Companies holding FRB 2028 must:

• Record the interest income under Section 56 in their Profit & Loss Account for AY 2026-27
• TDS of 10% will be deducted at source; this amount can be claimed as credit under Section 207 of the Income Tax Act 2025
• Disclose the investment and interest income in the Schedule FA (Financial Assets) of Form ITR-6 (if applicable) or relevant schedules in corporate returns

Impact on Overall Tax Liability:

The interest income from FRB 2028 will be added to your total income and taxed as per your applicable slab rate. For salaried individuals, this could push you into a higher tax bracket if your salary income plus this interest exceeds the slab threshold.

What Should You Do Now?

1. Verify Your Holdings & PAN Registration: Ensure your FRB 2028 holdings are registered correctly with your PAN. TDS will be deducted based on the PAN information provided to your bank or depository.

2. Monitor TDS Deduction: Keep track of TDS certificates (Form 16A) issued by the coupon-paying agent. The TDS of 10% should be credited to your TDS portal (NSDL) within 15 days of the interest payment date (typically in May 2027 for H1 2026-27 coupon).

3. Plan Your Tax Liability for AY 2026-27: If you are a high-income earner, calculate your estimated total income including this interest and plan advance tax payments (if required under Section 207 of the Income Tax Act 2025). The four installments of advance tax are due by June 15, September 15, December 15, and March 15 respectively.

4. Claim TDS Credit in ITR Filing: When filing your ITR for AY 2026-27, claim TDS credit under Schedule TDS (Form ITR-1 or relevant ITR form). Ensure the TDS certificate details match your return.

5. Consider Dividend Distribution Tax (DDT) Alternatives: Although DDT is not applicable to government securities, you may compare the FRB 2028 returns with other fixed-income instruments to optimize your investment portfolio.

6. Explore Exemptions If Eligible: If you are a trust, HUF, or other specified entity, explore whether your coupon income qualifies for exemptions under relevant sections of the Income Tax Act 2025.

Key Takeaways

• 6.45% Annual Interest: FRB 2028 will pay 6.45% p.a. for the October 2026 to April 2027 period, with a floating rate reset mechanism tied to 182-Day Treasury Bill yields plus 0.64% spread.
• TDS Deduction at 10%: Mandatory TDS of 10% applies on interest income from government securities (subject to PAN and income threshold exceptions); net return will be approximately 5.805% after TDS.
• Taxable as Income from Other Sources: Under Section 56 of the Income Tax Act 2025, all interest must be reported in your tax return for AY 2026-27, adding to your total income and potentially pushing you into a higher tax bracket.
• No Indexation or Long-Term Capital Gains Benefit: Government securities held to maturity do not attract indexation benefit or preferential LTCG treatment; interest is taxed as ordinary income at slab rates.
• Critical for ITR Filing: Ensure TDS certificates are received by August 31, 2026, and matched with your ITR for AY 2026-27 to avoid scrutiny notices and claim proper credit for taxes already deducted.

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