OMO Sale Auction Sep 2026: Income Tax Impact on Government Securities

What Happened?

The Reserve Bank of India (RBI) successfully completed an Open Market Operation (OMO) sale auction on September 28, 2026, with settlement on September 29, 2026. The central bank notified an aggregate amount of ₹25,000 crore in face value across six government securities maturing in 2029, 2030, and 2032. The auction received overwhelming participation with total bids amounting to ₹67,655 crore against the notified amount, demonstrating strong investor confidence. RBI accepted the full notified amount of ₹25,000 crore, with weighted average yields ranging from 6.66% to 7.09% across different securities.

Background & Legal Context

What Are Government Securities and OMO Sales?

Government Securities (GS), also called government bonds or gilts, are debt instruments issued by the central government to raise funds. Open Market Operations (OMO) are monetary policy tools used by RBI to inject or absorb liquidity from the banking system. When RBI conducts an OMO sale, it sells existing government securities to banks, financial institutions, and eligible investors. This September 2026 auction included securities with the following maturity dates:

• 7.59% GS 2029 (maturing in 2029)
• 6.45% GS 2029 (maturing in 2029)
• 7.61% GS 2030 (maturing in 2030)
• 5.85% GS 2030 (maturing in 2030)
• 6.54% GS 2032 (maturing in 2032)
• 7.26% GS 2032 (maturing in 2032)

Income Tax Treatment Under IT Act 2025

Government securities are subject to specific income tax provisions under the Income Tax Act 2025. The key sections governing taxation of GS investments are:

• Section 10(15)(iv)(a) — Interest earned on long-term securities (held for more than one year) qualifies for exemption under certain conditions
• Section 111A — Capital gains on sale of securities are taxed based on holding period (short-term vs. long-term)
• Section 193 — Tax deduction at source (TDS) on interest income
• Section 194LA — TDS on interest paid on government securities (2% for individuals and HUF)

Unlike fixed deposits or bonds issued by corporations, government securities enjoy preferential tax treatment in India. Interest income on government securities held for the specified period may be exempt from tax under Section 10(15)(iv)(a) of the IT Act 2025, provided certain conditions are met. However, capital gains arising from the sale of these securities before maturity are subject to capital gains tax.

For Assessment Year 2026-27, if you purchase government securities from this September 2026 auction and hold them till maturity, the interest income would be eligible for exemption. If you sell before maturity, any profit/loss would be computed as capital gain/loss.

What Does This Mean for You?

For Individual Investors

If you participated in this OMO auction or are planning to invest in the accepted securities, here's the tax impact:

• Interest Income Treatment: The coupon payments you receive (7.59%, 6.45%, 7.61%, 5.85%, 6.54%, 7.26%) are subject to TDS at 2% for individuals. However, if you hold the security till maturity, the net interest income may qualify for exemption under Section 10(15)(iv)(a) of IT Act 2025, subject to certain conditions and limits.
• Capital Gains: If you sell these securities before maturity through the secondary market, any gain or loss is treated as capital gain/loss. The nature (short-term or long-term) depends on your holding period.
• TDS Compliance: Even if interest is exempt, TDS will be deducted at source. You'll need to claim refund through your Income Tax Return (ITR) filing for AY 2026-27.

For Banks and Financial Institutions

Banks and NBFCs that won bids in this auction (52 bids accepted for GS 2032 and 26 for another GS 2032 security) will have different tax treatment:

• Interest income is taxable as per normal provisions (no exemption available)
• Capital gains are taxed based on holding period and entity type
• These securities will be classified under "Held for Trading" or "Available for Sale" categories for accounting purposes, affecting tax computation
• Mark-to-market losses on these securities may be deductible under Section 43(5) of IT Act 2025

For Corporate Investors

Corporates bidding in this auction must understand:

• All interest income from government securities is fully taxable
• No exemption available under Section 10(15)(iv)(a) for corporate entities — this benefit is restricted to individuals, HUF, and specified entities
• Capital gains tax applies on sale before maturity
• Deduction under Section 80C/80D not available for government securities

For NRI and Foreign Investors

While this OMO sale is primarily for RBI-eligible participants (banks, institutions), if NRI investors purchase these securities in secondary market:

• Interest income is subject to tax in India (no exemption under Section 10(15)(iv)(a))
• TDS applies at applicable rates
• Capital gains depend on tax residency status and applicable tax treaties

What Should You Do Now?

Action Items for Investment in These Securities:

1. Verify Your Eligibility: Check if you're an RBI-eligible participant. Individual retail investors typically cannot directly bid in RBI auctions — you purchase through banks or the NSE platform. Ensure your purchase route is compliant.
2. Understand Your Purchase Price: The weighted average prices for these securities range from ₹96.13 to ₹102.22. Your actual purchase price affects your capital gains calculation if you sell before maturity.
3. Plan for TDS: Remember that 2% TDS will be deducted on interest income. Maintain TDS certificates (Form 16A equivalent for government securities) for ITR filing.
4. Maintain Documentary Evidence: Keep all purchase confirmations, brokerage statements, interest payment receipts, and sale statements for tax audit purposes. Under IT Act 2025, documentation is critical for claiming exemptions or computing capital gains.
5. Assess Your Holding Period: Decide whether you'll hold till maturity (2029/2030/2032) or trade in secondary market. This affects tax liability computation significantly.
6. ITR Filing for AY 2026-27: Include interest income, TDS paid, and capital gains (if applicable) in your Income Tax Return. Don't forget to claim relief for taxes paid.
7. Consult for Exemptions: If you're an individual seeking Section 10(15)(iv)(a) exemption, verify specific conditions with a CA before claiming exemption in your ITR.

For Banks and Institutions:

• Update your Fixed Asset registers with correct acquisition costs and maturity dates
• Plan for mark-to-market valuations for accounting year-end
• Ensure proper classification of these securities (HFT/AFS) for both accounting and tax purposes
• Calculate Section 43(5) mark-to-market losses if applicable

Key Takeaways

• RBI Auction Success: The September 28, 2026 OMO sale was fully subscribed with ₹67,655 crore in bids against ₹25,000 crore notified, showing strong institutional participation and favorable weighted average yields (6.66%-7.09%).
• Tax Exemption Available: Individual investors holding government securities till maturity may claim exemption on interest income under Section 10(15)(iv)(a) of IT Act 2025, though TDS still applies at source and must be reclaimed via ITR.
• Capital Gains Tax Applies: Any profit from selling these securities before maturity is subject to capital gains tax. The nature (short-term/long-term) depends on holding period, affecting tax rate calculation for AY 2026-27.
• No Exemption for Corporates: Unlike individuals, corporate investors cannot claim exemption on government securities interest. All interest is fully taxable, making these less tax-efficient for corporate treasuries compared to individual portfolios.
• Compliance Priority: Maintain detailed records of purchase, interest receipts, TDS certificates, and sale transactions. Under IT Act 2025, proper documentation is essential for audit defense and correctly claiming exemptions or computing gains.

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