Capital Gains Tax Strategies for HNIs with Fixed Income Investments

Understanding Capital Gains Tax

For High Net-worth Individuals (HNIs) in India, optimizing taxes is as important as earning returns. With multiple asset classes in play—ranging from equity and real estate to bonds and alternative investments—understanding capital gains tax becomes critical to maximize wealth efficiency.

Among these, fixed income investments such as bonds, debentures, and structured debt products offer stability but also attract specific tax implications. For HNIs, careful tax planning can significantly influence net post-tax yield, especially when managing large portfolios.

This article by ultra explores how HNIs can use capital gains tax strategies to manage and optimize their fixed income investments effectively.

Capital gains tax is the tax levied on the profit earned from selling an investment asset. For fixed income instruments, the gain is typically the difference between the sale price and purchase cost (after adjusting for indexation, where applicable).

There are two types of capital gains:

• Short-Term Capital Gains (STCG): Gains from assets held for less than 36 months.

• Long-Term Capital Gains (LTCG): Gains from assets held for more than 36 months, often eligible for indexation benefits.

For example, selling a corporate bond after three years may qualify for LTCG treatment, reducing the tax burden significantly compared to STCG.

Tax Planning for High-Net-Worth Individuals

HNIs often fall in the highest tax bracket (30%), with a surcharge applicable depending on income levels. Strategic allocation among instruments with differential tax treatment helps optimize net returns.

1. Utilize Indexation Benefits

When investing in unlisted bonds or long-term debt instruments, indexation adjusts the cost of acquisition for inflation. This reduces taxable gains and enhances post-tax returns over time.

2. Focus on Long-Term Holdings

Extending the investment horizon to qualify for LTCG taxation can significantly reduce tax liability. For example, selling a bond after three years (instead of two) may bring down the effective tax rate from 30% to 10–20%.

3. Leverage Tax-Efficient Alternatives

Instead of traditional fixed deposits, HNIs can explore alternative fixed income assets such as:

• Secured Non-Convertible Debentures (NCDs)

• Invoice Discounting

• Asset Leasing Opportunities

Platforms like ultra curate such options, offering diversification with transparency and due diligence.

4. Optimize via Tax-Loss Harvesting

HNIs can offset capital gains from one investment against losses from another within the same financial year. This strategy, when applied systematically, minimizes overall tax outgo.

5. Explore Tax-Free Bonds

Investments in certain government-backed tax-free bonds (e.g., NHAI, PFC, REC) can yield steady returns exempt from tax under Section 10(15)(iv)(h). These instruments suit HNIs seeking safety and predictable income.

Comparing Fixed Income and Equity from a Tax Perspective

While equity investments benefit from concessional tax rates (LTCG at 10% beyond ₹1 lakh), fixed income instruments—especially debt mutual funds post-2023—are now taxed as per income slabs.

However, structured fixed income products continue to offer an edge through:

• Predictable coupon payouts

• Lower volatility

• Tax-efficient exits (especially in unlisted structures with indexation)

This makes them a compelling choice for investors focused on stability and post-tax income consistency.

HNI Investment Options for Tax-Efficient Returns

HNIs can consider a blend of traditional and alternative products to achieve tax optimization:

• Tax-Free PSU Bonds – for government-backed safety

• Unlisted NCDs – for long-term capital gain advantage

• Alternative Fixed Income (via ultra) – for steady returns and moderate risk

• REITs and InvITs – for diversified exposure with specific tax treatment

Each category has distinct lock-in, liquidity, and taxation characteristics, making professional advice essential for portfolio construction.

Tax Saving Plans for High Net-Worth Individuals in India

While fixed income instruments are central to capital protection, HNIs can complement them with other tax-saving avenues under the Income Tax Act, such as:

• Section 54EC Bonds – to reinvest capital gains from property

• National Pension System (NPS) – up to ₹2 lakh deduction

• ULIPs and ELSS funds – for long-term wealth creation

When combined strategically, these can lead to a balanced, tax-efficient portfolio.

Conclusion

For HNIs, tax efficiency is not just about saving taxes—it’s about structuring investments intelligently for optimal after-tax growth.

By understanding the capital gains implications of different fixed income products and leveraging tools like indexation, long-term holding, and diversified exposure through ultra, investors can enhance their net effective returns while maintaining portfolio stability.

In today’s evolving financial landscape, well-planned tax strategies can help HNIs sustain wealth and generate consistent, compliant income streams.

FAQs

1. What is the capital gains tax rate for HNIs in India?

HNIs are taxed at slab rates for short-term gains, while long-term capital gains on listed bonds are taxed at 10% without indexation and unlisted bonds at 20% with indexation.

2. How can HNIs reduce tax on fixed income returns?

By holding investments for the long term, using indexation benefits, and exploring tax-free or alternative debt instruments.

3. Are tax-free bonds still available in India?

Yes, select government-backed entities issue tax-free bonds, though availability is limited in the secondary market.

4. Why should HNIs consider alternative fixed income products?

They offer diversification, better post-tax returns, and lower volatility than equities or traditional deposits.

5. How does ultra help in tax-efficient investing?

ultra provides curated access to diversified fixed income opportunities, enabling investors to make informed, compliant, and tax-smart investment choices.