You can take exposure to bonds in various ways. You can purchase them in the primary public issues, in the secondary market from the bond dealing houses or from the exchanges (NSE / BSE) through a broker. Now, you can purchase government bonds through RBI’s Retail Direct Gilt platform. The basics of taxation of bonds are known. The key points are as follows:
The coupon or interest on bonds/debentures is taxable as ‘other income’, which is taxed at your marginal slab rate i.e. 30% plus surcharge and cess.

The capital gains tax component is taxable at a relatively lower rate.

For listed bonds, the holding period required for taxation as long-term capital gains is one year.

For a holding period of more than one year, the rate is 10% plus surcharge and cess.

Indexation is not available on bonds, except Sovereign Gold Bonds.

Certain cases of bond transactions are clear and simple. For example, there is no capital gain if you purchase a bond in the primary market and hold it till maturity. The coupon / interest you receive at periodic intervals is taxable at your slab rate i.e. 30% plus surcharge and cess. Suppose you purchase a bond in the primary market for ₹100, it is listed at the exchange, you hold it for more than one year and sell it for ₹102 prior to maturity. The coupons are taxable at your slab rate and the capital gain of ₹2 is taxable at 10% plus surcharge and cess.

However, not all cases are as straightforward. When a bond transaction happens in the secondary market, there is a component of accrued interest, from the last interest payout date upto the deal date. The rationale here is that the issuing company pays coupon on the defined payout date, which is usually annual for corporate bonds. In between, the bonds may change hands in the secondary market. The seller would not get interest from the issuing company on the next coupon date. Hence, the buyer compensates the seller for the proportionate interest for that period. Subsequently, the buyer may sell it, prior to maturity. In such cases, while the basic principles of taxation remain same, we have to scratch the surface.
Let us say, there is a bond of face value ₹100. A secondary market transaction is happening through a bond dealing house, at a deal value of ₹101.5. For your taxation purposes, you have to know the break-down of ₹101.5. Of this, ₹100 is obviously the face value. Let us say, for illustration purposes, the accrued interest is ₹1 and ₹0.5 is the price premium. This bond has annual coupon payout, is listed, and you hold it for more than one year. When you receive the next interest payout, say ₹7, you can adjust ₹1 and pay tax on ₹6. The logic is, though you are receiving ₹7 on cash basis, you have not held the bond from the last payout date and till your deal date. You have already compensated the seller for accrued interest. Subsequently, after holding for more than one year from your purchase date, you sell it in the secondary market. For illustration, let us say your total sale price is ₹101.25, of which ₹100 is face value, ₹0.5 is accrual and ₹0.75 is price premium. Then, how does taxation work? On the accrual component of ₹0.5, you pay tax at 30% plus surcharge and cess.

For capital gains, you have to compare price to price, which is pure price apart from accrual component. In this case, your purchase price is ₹100.5 and sale price is ₹100.75. Hence on the long-term capital gain of ₹0.25 per bond, you pay tax at 10% plus surcharge and cess.

So far so good. But, where would you get the details of this tax breakdown? For you, and also for the tax authorities, the base document is the contract note or deal confirmation given by the bond dealing house, which usually has the clean price (pure price component) and the accrued interest, which add up to the total deal value. The issue is when you are doing a deal on the NSE / BSE trading screen, what you see and deal on, is the total price consideration. The details of accrual and clean price are not available on the trading screen or the usual contract note of an equity-oriented broker.

Source: https://www.livemint.com/money/personal-finance/know-your-bond-transactions-and-the-tax-implications-11660758360750.html