Corporate Bond Redemption: Meaning, Types, Process & Taxation in India

India’s emergence as a global economic superpower owes much to its thriving bond market, driving innovation and growth in infrastructure and industries at large.

As of March 2024, the value of the Indian bond market stands at a whopping INR 217 trillion, or $2.56 trillion, and underlines the very importance the bond market enjoys in the financial architecture of the country¹.

Currently, corporate bonds constitute 22% of the total outstanding in India’s bond market. Though money market instruments are less than 10%, G-secs represent the majority, followed by state development loans (SDLs) and corporate bonds. 

Corporate bonds are attractive to investors since they can offer higher potential returns. For those investing in corporate debt, knowing how issuers repay bondholders at maturity is key. 

This article explains the different types, terms, and approaches related to corporate bond redemption, offering useful perspectives to help investors effectively navigate this changing terrain.

Understanding Corporate Bond Redemption

Bond redemption involves the repayment of the original principal amount to the bondholder at maturity. 

However, some bonds allow for early redemption; either the issuer can exercise a call provision to redeem, or the investor can exercise a put provision to redeem. If a bond is paid off at either its maturity or before it as well is considered redeemed, where the bondholder would receive, not only the amount originally invested but also the interest that was accrued over the period since the last interest payment was made.

Key Corporate Bond Redemption Terms 

In order to understand the process of the repayment of bonds, understand these concepts: 

• The face value is the value of the bond at the time of its maturity and in most cases, it is one thousand rupees in India.
• The date of maturity is the date on which the bond issuer pays the bondholder the amount which was borrowed with an agreement of its return being on the specified date (the Principal Amount).
• Redemption yield signifies the total return the bond investor makes - consisting of interest earned and any price increases until the bond is repaid at maturity.

Key Corporate Bond Redemption Terms 

To understand the process of the repayment of bonds, understand these concepts: 

• Face Value: The amount that is agreed to be repaid by the issuer of the bond to the bondholder upon maturity. This term is also referred to as the par value of the bond.
• Maturity Date: The date on which the bond matures after its full tenure and when repayment of the principal amount will be made by the issuer of the bond.
• Redemption Value: The value received by the investor in case the bond gets redeemed. The value could be either the face value or with a premium.
• Redemption Premium: Extra amount paid over and above the face value on redemption of the bond.
• Face Value: Amount payable at the time of maturity of the bond by the issuer to the bondholder. It is otherwise known as the par value of the bond.
• Date of Maturity: Date on which the bond reaches its maturity period and when the repayment of the principal amount takes place.
• Redemption Value: Amount obtained by the investor in case of redemption of the bond. It may be the face value of the bond or with an added premium.
• Redemption Premium: Additional amount payable above the face value of the bond at the time of its redemption.

Different Types Of Corporate Bond Redemption

Bonds can be redeemed in various ways; here are some ways: 

1. Maturity Redemption

Redemption at maturity means that the issuer of the bond gives back to the bondholder the full face value of the bond at a maturity date. This is agreed upon at the time of issuance. 

Let us assume that a company issues a bond with the following terms:

In other words, at the end of 5 years, the company will repay the bondholder INR 1,000. 

Furthermore, the bondholder has also earned 5% annual interest over 5 years:

Annual Interest: INR 1,000 × 5% = INR 50

Total Interest Over 5 Years: INR 50 × 5 = INR 250

The total of the principal amount and the interest will be INR 1,000 + INR 250 = INR 1,250.

2. Call Redemption

A callable bond is a type of bond that allows the issuer to repay the principal amount before its scheduled maturity date. The issuer usually does so when the market interest rates decline. This becomes possible because, at lower interest rates, the issuer can refinance debt cheaply.

While this saves the issuer on interest costs, it imposes a kind of reinvestment risk on the investor. Investors receive their principal earlier than anticipated and may need to reinvest the funds at the current lower interest rates.

Understand the callable bond mechanism by taking an example of Company ABC. ABC issues a callable bond with a face value of INR 1,000, coupon rate is 5%, and maturity period is 10 years.

In this case, in the initial five years from this issue date, if interest rates decline to less than 3%, then company ABC will have the option to call the bond at a premium of 2%.

In case the issuer redeems after three years, then the investors will be paid INR 1,020 instead of the standard amount of INR 1,000.

3. Put Redemption

Put redemption is the procedure linked to putable bonds, where bondholders have the right to resell the bond to the issuer before it is due. It finds significance in a bullish interest rate environment, where the bondholders can sell the bonds and invest in new ones with higher yields. It confers bondholders with greater flexibility and reduces their losses ensuing from bad market conditions.

Say now you buy from XYZ Corporation a 10-year putable bond with a face value of INR 1,000 and a 5% coupon.

At the end of 5 years - the market interest rates climb to 7%. Thus, the market value of the bond is INR 980 just because fixed-coupon bond prices decrease due to rising interest rates.

The execution of the put option allows you to redeem the bond at INR 980 and invest the proceeds at a higher interest rate of 7%.

4. Conversion Redemption

Conversion redemption involves converting the bonds into equity shares in the issuing company instead of redeeming them. It is essentially exercised when the company’s stock performs well or offers ample opportunity for returns for the investor. 

It provides a perspective of a mix between fixed-income stability and the possibility of equity growth, as adopted by those investors seeking this combination.

5. Staggered Payments Redemption

Staggered payment redemption is a method where the principal amount is paid back in multiple instalments instead of all at once. This reduces the burden of repayment on the issuer while providing, step by step, an easily predictable and steady cash inflow for the bondholder. 

It is most often used in large infrastructure or long-term development projects where revenue from such a project is generated in phases.

Key Factors Influencing Bond Redemption

There are several factors that impact the corporate bond redemption of the bond: 

• Interest Rates: Declining rates make callable bonds redeem early. Rising rates affect putable bonds. 
• Financial Well-being of Issuer: A financially sound issuer would be able to finalise redemption terms quite smoothly.
• Type: Callable, putable, or convertible bonds have specific redemption clauses in which redemption terms define timing and payment terms.

Common Mistakes To Avoid When Redeeming Bonds 

Understanding the process of bond redemption can assist in protecting investors from any unnecessary losses. Below are some common mistakes that need to be avoided:

• Failing to Review Redemption Details: This can include the maturity period, details on calls or puts, price and other terms involved in the redemption of the bond.
• Failing to Consider Market Conditions: The interest rate and bond price can influence whether or not it is wise to sell the bond prematurely.
• Neglecting the Issue of Liquidity: Some of the bonds issued by companies may lack adequate buyers in the secondary market, thus making their sale difficult.
• Failure to Consider Accrued Interest: If one sells a bond between the coupon payment dates, accrued interest can have an impact on the total amount of the settlement.
• Failing to Consider Tax Implications: Bond interest and gains may be treated differently under the tax law.

How To Sell Bonds Before Maturity: Step-by-Step Guide

In case you wish not to keep the bond until its maturity period, then there could be an opportunity to sell the bond in the secondary market if there is enough liquidity in the market. Below is how one would go about selling the bonds before their maturity.

Step 1: Find Out If the Bond is Tradable

Check if the bond is tradable on the market.

Step 2: Check Market Price

Evaluate the current market price, the yield, and the available buy offers. The selling price can be higher or lower than the par value.

Step 3: Execute a Sell Offer

Log into the trading platform where you can trade the bonds and execute the sell order.

Step 4: Wait for Order Execution

The execution of an order takes place when there is an appropriate buyer, and the order fulfillment criteria are met. The time taken to sell less-liquid bonds can be higher.

Step 5: Finalize the Settlement Process

Once the order has been executed, the debiting of bonds from your demat account and the receipt of funds will happen via the relevant settlement process.

Step 6: Tax Treatment

Determine whether the trade will result in a gain or loss and treat the same accordingly in the income tax filing process.

Tax Implications of Corporate Bond Redemption

Interest and capital gain are two modes through which investors earn from bonds. The interest, which is the regular income received from the bond during its term, is added to the gross total income of individuals and taxed based on the slab rate.

If a bond is sold for more than the purchase price, then that would be known as capital gain. 

For listed bonds, if a bond is redeemed before 12 months, STCG or short term capital gain is charged at applicable slab rates. If redeemed after 12 months, LTCG or long term capital gain is levied at 12.5% without indexation.

For non-listed bonds, tax is taxed at applicable slab rates for both short and long term gains.

Example: Tax Calculation on Bond Redemption

In case you buy a listed corporate bond for INR 90,000 and redeem it after two years for INR 1,00,000.

Purchase Cost = INR 90,000

Redemption Price = INR 1,00,000

Capital Gain = INR 1,00,000 – INR 90,000 = INR 10,000

As the listed bond is held for more than 12 months, the INR 10,000 capital gain will be considered as long-term capital gain (LTCG).

LTCG Tax = INR 10,000 × 12.5% = INR 1,250

Thus, the capital gain tax payable for the bond redemption will be INR 1,250 without any surcharge and cess. It gives an idea about the tax on bond redemption in India in 2026.

As far as the tax calculation of unlisted bonds and debentures is concerned, the situation is completely different.

Tax for LTCG = INR 10,000 x 12.5% = INR 1,250

Hence, the tax that will be levied upon the capital gain from bond redemption would be INR 1,250, excluding any surcharge and cess. It serves as an example of the tax on bond redemption in India in 2026.

In case of unlisted bonds and debentures, the process is a bit different. Under Section 50AA, gains from transfer, redemption, or maturity of such investments are considered to be short-term capital gains.

Conclusion

Corporate bond redemption is a key component of bond investing and should be understood by all investors. Understanding types of redemption to the factors that influence them, and tax implications will really help in guiding investment decisions. Whether it is a simple maturity bond, or more complex options like callable or convertible bonds, knowing how and when redemption happens ensures a more peaceful investment experience.

Corporate bonds can prove to be lucrative for people interested in stable returns only with due regard to the issuing company’s credibility and redemption terms.

Invest in AAA rated bonds, regulated and provide high returns with Grip Invest!   

FAQs On Bond Redemption

References

1. NSE, Accessed from https://nsearchives.nseindia.com/web/sites/default/files/inline-files/NSE_Assocham_Corporate_Bond_Report_2024.pdf

Author: Grip Invest Editorial Team The Grip Invest Editorial Team is a group of Chartered Accountants, MBA (Finance) graduates, and Qualified Research Analysts dedicated to helping you invest smarter. We dive deep into India's fixed income landscape to deliver content that is accurate, up-to-date, and easy to understand. Whether you're exploring bonds, fixed deposits, or other fixed income opportunities, our guides cut through the noise and give you the clarity to make better financial decisions.

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