OMO Sale Auction Oct 2026: Tax Impact on Government Securities

What Happened?

On October 13, 2026, the Reserve Bank of India (RBI) conducted an Open Market Operation (OMO) sale auction, with settlement on October 14, 2026. The RBI notified an aggregate amount of ₹25,000 crore (face value) for sale. Market participants submitted bids totaling ₹55,518 crore, demonstrating strong investor interest. The RBI accepted the full notified amount of ₹25,000 crore across six different government securities with varying maturity dates and coupon rates, ranging from 6.10% to 7.95%.

Background & Legal Context

What are Government Securities (G-Secs)?

Government Securities are debt instruments issued by the Government of India to raise funds. They are considered the safest investment instruments in India, backed by sovereign guarantee. The RBI conducts regular OMO auctions to manage liquidity in the banking system and stabilize interest rates.

Tax Treatment Under Income Tax Act 2025

The taxation of government securities is governed by several provisions of the Income Tax Act 2025:

• Section 10(15)(iv) of IT Act 2025: Interest income earned on Government Securities issued after April 1, 2020, is fully taxable for all categories of investors. This is a critical change from earlier years when certain exemptions existed.
• Section 54EC and 54F: These sections provide exemptions on capital gains if the proceeds from sale of Government Securities are invested in specified bonds, but only for residential property gains under Section 54.
• Section 194A: Banks and post offices are required to deduct 10% TDS (Tax Deducted at Source) on interest income from G-Secs for individuals, if interest exceeds ₹40,000 in a financial year (₹50,000 for senior citizens).
• Capital Gains: Under Section 48 of IT Act 2025, any profit arising from the sale of G-Secs before maturity is treated as capital gains. The nature of capital gain (short-term or long-term) depends on the holding period of 12 months or more.

Applicable Assessment Year (AY 2026-27)

For investors purchasing G-Secs through this October 2026 auction, the first taxation will apply in Assessment Year 2026-27 (for Financial Year 2025-26 onwards). Interest received from these securities will be taxable in the year of receipt.

What Does This Mean for You?

For Individual Investors:

• If you invested in the 7.88% GS 2030, 6.10% GS 2031, or any other security through this auction, all coupon (interest) payments are fully taxable as per Section 10(15)(iv) of IT Act 2025. There is no exemption available.
• TDS of 10% will be deducted by the RBI or depository at source on your interest income. You will receive net interest after TDS deduction.
• If you sell these securities before maturity through secondary market, any gain or loss will be treated as capital gain/loss under Section 48. If held for more than 12 months, it qualifies as long-term capital gain (LTCG) taxable at lower rates.
• Your total income (including G-Sec interest) determines your slab rate under Section 17 of IT Act 2025. Higher income brackets may face higher taxation.

For Financial Institutions and HNIs:

• Banks, insurance companies, and mutual funds that participated in this OMO auction must track acquisition cost and fair value. These securities are typically marked-to-market under Schedule VI (Financial Assets) of the IT Act 2025.
• Investment income from G-Secs forms part of business income and attracts applicable income tax rates. GST does not apply on government securities transactions under Schedule III of IGST Act 2017 (Exemption Category).
• Securities Lending & Borrowing (SLB) transactions involving G-Secs purchased through this auction must comply with TDS provisions under Section 194G if applicable.

GST Perspective (Not Applicable):

Government securities are exempt from GST under the exemption schedule. No GST is payable on purchase, sale, or holding of G-Secs issued through RBI auctions. This applies to AY 2026-27.

What Should You Do Now?

Action Items for G-Sec Investors:

• Maintain Investment Records: Keep a detailed record of purchase date, security name, maturity date, coupon rate (6.10% to 7.95% as per this auction), and actual acquisition cost. This is essential for computing capital gains if you sell before maturity.
• Plan for TDS Deduction: Expect 10% TDS deduction on semi-annual or annual coupon payments, depending on the security terms. If your total income is below taxable limits, claim a refund by filing Income Tax Return (ITR) for AY 2026-27.
• Track Interest Income Separately: Interest received from G-Secs must be reported separately in your ITR under the head "Income from Other Sources" (Schedule OS in ITR 2025 format).
• Monitor Secondary Market Sales: If you plan to sell these securities before maturity, calculate the holding period. Sales after 12 months attract LTCG tax rates (typically 20% with indexation benefit under Section 48(1) of IT Act 2025). Sales within 12 months attract STCG tax at your applicable slab rate.
• Document Compliance: If you are an institutional investor (bank, insurance company), ensure your investment accounting complies with both RBI guidelines and Section 128 onwards of IT Act 2025 (provisions for business income).
• Consult on Tax Planning: Given the six different securities accepted in this auction (with varying yields from 7.1428% to 7.3947%), consider your cash flow needs. Longer-maturity securities may offer capital appreciation if interest rates fall, while shorter maturities provide early reinvestment opportunities.

Key Takeaways

• Full Interest Taxability: All interest income on G-Secs from this October 2026 auction is fully taxable under Section 10(15)(iv) of IT Act 2025. No exemptions available for any investor category.
• TDS at 10%: Expect automatic TDS deduction of 10% on coupon payments. Individual investors can claim refund if gross total income is below taxable limit (AY 2026-27).
• Capital Gains Treatment: Sales before maturity are subject to LTCG (20% with indexation) if held over 12 months, or STCG (at slab rates) if held under 12 months under Section 48 of IT Act 2025.
• No GST Impact: Government securities are GST-exempt under Schedule III of IGST Act 2017. Zero GST applies on all transactions related to these securities.
• Documentation Critical: Maintain acquisition records, interest statements, and TDS certificates for audit trail and ITR filing for AY 2026-27 onwards.

Bottom Line: The RBI's OMO sale auction on October 13, 2026, offers investors a range of government securities with attractive yields (6.10% to 7.95%). However, under the Income Tax Act 2025, all interest income is fully taxable, and TDS of 10% will be deducted at source. If you invested in these securities, carefully plan your tax position for AY 2026-27, track your holding period for capital gains calculation, and maintain detailed records. For institutional investors, ensure compliance with both RBI regulations and IT Act provisions for financial assets.

Need expert help with this? EaseValue CAs in Jaipur — WhatsApp 63677 44602