Taxation of Invoice Discounting and Other Alternative Fixed Income Products
08 November 2025 ·
A comprehensive guide for HNIs to understand the tax implications of investing in invoice discounting, bonds, and other alternative fixed income opportunities.
Taxation of Invoice Discounting
In recent years, High Net-worth Individuals (HNIs) have shown a growing interest in alternative fixed income products such as invoice discounting, private debt, and non-convertible debentures (NCDs). These instruments offer attractive yields and steady returns compared to traditional bank deposits.
However, while the returns are appealing, investors must also evaluate the tax implications that come with these investments. Proper tax planning not only helps maximize post-tax returns but also ensures compliance with India’s financial regulations.
Let’s take a closer look at how different alternative fixed income instruments are taxed — and how platforms like ultra help investors make tax-efficient decisions.
Invoice discounting allows businesses to sell their unpaid invoices to investors at a discount to meet short-term liquidity needs. In return, investors earn a fixed return once the invoice is paid.
How Returns Are Taxed:
The returns from invoice discounting are typically treated as “interest income” or “income from other sources” under the Income Tax Act, 1961.
Such income is taxed at the investor’s applicable slab rate (e.g., 30% for HNIs).
There is no indexation benefit or capital gains treatment since the returns are not linked to an appreciation in asset value but to the discount offered on the invoice.
Example:
If an HNI invests ₹10 lakh in an invoice discounting opportunity and earns ₹1 lakh as return over 6 months, the ₹1 lakh is added to their taxable income and taxed as per their income slab.
Key takeaway: Invoice discounting can yield attractive pre-tax returns (10–14% annually), but understanding the post-tax yield is critical for accurate portfolio planning.
Taxation of Bonds and Non-Convertible Debentures (NCDs)
Bonds and NCDs are popular fixed income options among HNIs due to their predictable income streams. However, the taxation varies depending on whether they are listed or unlisted and held short-term or long-term.
Interest Income:
The interest earned is taxed at the applicable income tax slab rate.
For listed NCDs, Tax Deducted at Source (TDS) may apply if the issuer deducts tax before payout.
Capital Gains:
Listed Bonds/NCDs:
Held for less than 12 months → Short-Term Capital Gains (STCG) taxed at the slab rate.
Held for more than 12 months → Long-Term Capital Gains (LTCG) taxed at 10% without indexation.
Unlisted Bonds/NCDs:
Held for less than 36 months → STCG taxed at the slab rate.
Held for more than 36 months → LTCG taxed at 20% with indexation.
Pro Tip: Holding bonds for the long term can significantly improve post-tax efficiency, especially for HNIs in higher tax brackets.
Taxation of Asset Leasing and Structured Debt Products
In asset leasing or structured debt, investors fund equipment, machinery, or assets leased to corporates. Returns are typically fixed, similar to interest.
Tax Treatment:
The income is treated as interest or lease rental and taxed at the investor’s slab rate.
If the structure involves a Special Purpose Vehicle (SPV), taxation can differ depending on whether the investor receives dividends or interest payouts.
Some SPVs offer tax-efficient payout structures by utilizing depreciation and other allowable deductions to reduce taxable income at the entity level before distribution.
ultra offers structured investment opportunities where taxation and compliance details are clearly disclosed to help investors plan effectively.
Taxation of Alternative Investment Funds (AIFs)
Alternative Investment Funds, especially Category II AIFs, pool investor capital to invest in private debt, real estate, or other alternative assets.
Tax Structure:
AIFs generally follow a pass-through taxation model for income (other than business income).
The investor is directly liable to pay tax on income distributed by the fund based on their applicable slab rate.
Category I and II AIFs pass through long-term capital gains, short-term gains, and interest income to investors for taxation at individual levels.
Category III AIFs, however, are taxed at the fund level (at 30%), and investors receive post-tax income.
Comparing Taxation: Fixed Deposits vs. Alternative Fixed Income
| Investment Type | Tax on Income | Holding Period for LTCG | LTCG Tax Rate | Post-Tax Yield (Approx.) |
|---|---|---|---|---|
| Fixed Deposits | Slab Rate (up to 30%) | NA | NA | 4–5% |
| Invoice Discounting | Slab Rate (up to 30%) | NA | NA | 7–10% |
| Listed Bonds/NCDs | 10% (LTCG) | 12 months | 10% | 6–9% |
| Unlisted Bonds | 20% (with indexation) | 36 months | 20% | 7–10% |
| Asset Leasing | Slab Rate | NA | NA | 8–11% |
| AIF (Cat II) | Pass-through | Depends on asset | 10–20% | 9–12% |
Tax Planning Strategies for HNIs
To enhance post-tax returns, HNIs can adopt the following strategies:
Hold investments longer: Benefit from LTCG rates or indexation.
Opt for listed instruments: Gain liquidity and better tax treatment.
Diversify across instruments: Spread tax impact over multiple sources of income.
Use tax-efficient structures: Choose investments through regulated AIFs or SPVs that optimize tax outflows.
Consult professionals: Always evaluate the post-tax yield before investing.
ultra simplifies this process by presenting clear, transparent tax information for every listed opportunity — empowering investors to make informed, tax-efficient decisions.
Conclusion
As HNIs explore alternative fixed income products like invoice discounting, NCDs, and structured debt, understanding the taxation framework becomes critical to maximize real returns. While the pre-tax yields in these instruments are attractive, the actual gain depends on how efficiently taxes are managed.
With platforms like ultra, investors gain access to professionally curated opportunities, complete with detailed financial, risk, and tax insights — helping them build diversified, compliant, and tax-smart portfolios.
FAQs
1. How is income from invoice discounting taxed in India?
It is treated as “income from other sources” and taxed as per the investor’s income tax slab rate.
2. Are alternative fixed income products more tax-efficient than fixed deposits?
Yes. Many alternatives like listed bonds or AIFs offer lower LTCG rates (10–20%) compared to FD interest, which is fully taxable.
3. Can HNIs claim indexation benefits on bond investments?
Indexation benefits apply to unlisted bonds or NCDs held for more than 36 months, reducing overall tax liability.
4. Do platforms like ultra deduct TDS on returns?
TDS applicability depends on the product structure and issuer; ultra provides full tax details for every listed investment.
5. What is the best way for HNIs to plan taxes on alternative investments?
Diversify across different instruments, consider holding period benefits, and consult a tax advisor to structure investments efficiently.