Conceptual · Article 2.1.5.1
All About Corporate Bonds.
A Loan to a Company, a Fixed Coupon, and the Quiet Middle Ground Between Safety and Growth.
Published as on 9 July 2026
A corporate bond is a formal loan you give to a company: it pays you a fixed coupon each year and returns your principal at maturity. In exchange for a modest premium over government bonds, AAA names now yield roughly 6.8-7.5% against 6.68% on the 10-year G-Sec, you take on credit risk, the chance the company cannot pay. This is a guide to what corporate bonds are, where they fit between G-Secs and equity, the two risks that define them, how India taxes listed and unlisted bonds differently, and how to buy and evaluate them without repeating the mistakes that cost IL&FS and DHFL investors dearly.
6.8-7.5%
AAA Corporate Bond Yield (Feb 2026)
6.68%
10-Year G-Sec Yield
Credit + Rate
The Two Core Risks
12.5% / Slab
LTCG Listed / Unlisted Bonds
Executive Summary · Page 2
Executive Summary · 7 Findings
A corporate bond is not a safer stock or a tradable fixed deposit. It is a loan to a company that pays a fixed coupon and returns principal at maturity, if the company stays solvent. You are paid a small premium over G-Secs to carry credit risk, and that premium is now unusually thin.
This article covers what corporate bonds are and how they work, where they sit on the risk-return spectrum, the two core risks plus liquidity, how listed and unlisted bonds are taxed in India, how to buy and evaluate them, and the framework for deciding whether they belong in your plan.
Key Findings
A corporate bond is a loan to a company, not an ownership stake.
You lend the issuer money; it pays you a fixed coupon periodically and repays your principal at maturity. You are a creditor, not a shareholder, so you get contractual income but no voting rights and no share of profits. That is the whole instrument in one sentence.
The yield premium over G-Secs has compressed to almost nothing.
AAA corporate bonds yield about 6.8-7.5% against roughly 6.68% on the 10-year G-Sec (February 2026), a spread of just 0.12-0.82%, down from the historical 1.5-2%, after 125 basis points of RBI rate cuts in 2025. You are being paid little for the credit risk you take.
Two core risks define the instrument: credit and interest-rate.
Credit risk is the chance the issuer misses a coupon, defaults, or is downgraded. Interest-rate risk is the inverse move of bond prices to market rates. A third, liquidity risk, means even listed bonds can be hard to sell. Credit risk is permanent; rate risk fades if you hold to maturity.
AAA does not mean no risk, it means low probability of default.
IL&FS was rated AAA weeks before defaulting on about Rs 91,000 crore in September 2018, falling from AAA to D in under two months. DHFL followed in June 2019. Ratings are backward-looking opinions, paid for by issuers, not guarantees. Monitor them quarterly.
Coupon is taxed at slab; listed capital gains get a 12.5% rate.
Interest is taxed as Income from Other Sources at your slab, exactly like an FD. For listed bonds held over 12 months, capital gains are taxed at 12.5% without indexation. Unlisted bonds lost that benefit under Finance Act 2023, all gains at slab, so listed bonds are far more tax-efficient.
Bonds are a middle-layer income instrument, not a growth engine.
They sit between sovereign G-Secs and volatile equity: steadier than stocks, riskier than FDs. In the March 2020 crash, AAA bond prices fell 3-5% while the Nifty fell 38%. You buy them for predictable income and capital preservation, not appreciation.
Below Rs 20 lakh, a bond fund usually beats buying single bonds.
One bond is one company's fate. A fund or target maturity fund spreads risk across 30-50 issuers with professional credit monitoring. Individual listed bonds earn their keep above Rs 50 lakh, where you can build a diversified 8-10 issuer ladder and capture the tax edge.
Full analysis continues across Parts I to V below
At A Glance
| Metric | Value | Detail |
|---|---|---|
| AAA Corporate Yield | 6.8-7.5% | February 2026, indicative |
| 10-Year G-Sec Yield | ~6.68% | Sovereign benchmark |
| Credit Spread | 0.12-0.82% | Down from 1.5-2% historically |
| RBI Repo Rate | 5.25% | After 125 bps cuts in 2025 |
| Coupon / Interest Tax | Slab | Income from Other Sources |
| LTCG, Listed (>12m) | 12.5% | No indexation |
| Capital Gains, Unlisted | Slab | Any holding period |
Exhibit 01: The Risk-Return Spectrum
| Instrument | Yield (Feb 2026) | Credit Risk |
|---|---|---|
| G-Secs | 6.5-6.7% | Very low |
| AAA Corporate | 6.8-7.5% | Moderate |
| AA / A Corporate | 7.5-8.5% | Moderate-high |
| Below BBB (junk) | 9-12%+ | High |
Indicative yields, February 2026. Illustrative. ADWIZR analysis.
The Opening · Page 3
The Opening
A corporate bond is a formal loan you give to a company rather than to the government. Buy a five-year bond with an 8% coupon for Rs 1 lakh and the company pays you Rs 8,000 each year, then returns your Rs 1 lakh at maturity. You become a creditor with a contractual claim, not a shareholder with a stake in the upside.
When SBI, NTPC, or Tata Motors issues a bond, you are lending to that specific entity, which uses the money for expansion, refinancing, or working capital. The appeal is a predictable stream of income that does not swing with the equity market, and a yield a little above what a government bond pays.
That extra yield is not a free lunch. It is the price of credit risk: the government can, in the last resort, print rupees to honour its debt, but a private company can and does default. The corporate bond market lives entirely in the gap between those two facts, and the size of that gap, the credit spread, is what you are really being paid.
"A G-Sec asks you to trust the sovereign. A corporate bond asks you to trust a company, and pays you a little extra for the doubt. Right now, that little extra is unusually little."
The Price of Doubt
What a corporate bond is not: it is not a bank fixed deposit (no DICGC insurance), it is not equity (no ownership or growth), and it is not risk-free (even AAA names have defaulted). It is a structured income instrument, and its behaviour is governed by two forces, the issuer's creditworthiness and the direction of interest rates, that the rest of this guide unpacks.
Structure
Part I
What Corporate Bonds Are and How They Work
Part II
Where They Fit and Why They Pay More Than G-Secs
Part III
The Two Core Risks, Plus Liquidity
Part IV
Taxation in India: Listed vs Unlisted
Part V
How to Buy, Evaluate, and Avoid Mistakes
Part VI
The Verdict: When Corporate Bonds Belong
What a Corporate Bond Provides
✓ Fixed, predictable coupon income
✓ Principal back at maturity if solvent
✓ A yield premium over G-Secs
✓ Lower volatility than equity
What It Does Not Provide
✕ DICGC deposit insurance
✕ Freedom from default risk
✕ Reliable liquidity before maturity
✕ Capital growth like shares
Part I
What They Are and How They Work
The coupon, the maturity, the ratings ladder, and the many shapes a corporate bond takes.
Part I: What They Are and How They Work · Page 4
The Mechanics of a Loan
Three things happen when you buy a corporate bond. The company pays you periodic interest, the coupon, often annually or semi-annually. It repays your principal on the maturity date. And throughout, you remain a creditor, ahead of shareholders if things go wrong, but with no claim on profits if things go well.
The coupon is the fixed rate printed on the bond. The yield to maturity (YTM) is the actual return if you buy at today's market price and hold to the end, folding in any gain or loss versus face value. Buy below face value and your YTM exceeds the coupon; buy above and it is lower. YTM, not coupon, is the number to compare across bonds.
The Many Shapes of a Bond
Secured vs unsecured: secured bonds are backed by specific assets like property or machinery, improving recovery if the issuer defaults; unsecured bonds rely on creditworthiness alone.
Listed vs unlisted: listed bonds trade on the NSE or BSE, offer better transparency and a decisive tax advantage; unlisted bonds are privately placed, usually with higher minimums and no ready market. Non-convertible debentures (NCDs) are a common form of corporate bond.
"Corporate bonds run from public-sector giants like NTPC and IRFC to leveraged private borrowers. Same instrument, wildly different risk, which is exactly why the credit rating exists."
One Label, Many Risks
The Ratings Ladder
In India, four SEBI-registered agencies, CRISIL, ICRA, CARE, and India Ratings, assess an issuer's ability to pay and assign a rating. It is the single most important shorthand for credit risk.
Investment Grade (AAA to BBB)
AAA is highest safety (HDFC, NTPC, PFC, IRFC); AA high safety; A adequate; BBB is the minimum investment grade, below which many institutions cannot buy.
Speculative Grade (BB to D)
BB and below are speculative "junk" bonds with high default probability. D means the issuer is already in default. Higher advertised yields here are risk pricing, not free return.
How You Hold It
Bonds are credited to your demat account in T+1 or T+2, and coupons are paid directly to your bank account on schedule. You can hold to maturity for the certainty of face value, or attempt to sell on the exchange, subject to liquidity, before then.
| Rating | Meaning | Example Issuers |
|---|---|---|
| AAA | Highest safety | NTPC, PFC, IRFC |
| AA | High safety | Large corporates |
| A / BBB | Adequate / minimum IG | Mid-sized NBFCs |
| D | Default | IL&FS (2018) |
Part II
Where They Fit
The middle layer between G-Secs and equity, and why the premium over government bonds has shrunk.
Part II: Where They Fit · Page 6
The Middle Layer of Income
Picture a ladder. At the bottom sit G-Secs and insured bank FDs, very low risk, modest return. At the top sit equities, high risk, high potential growth. Corporate bonds occupy the rungs in between: more yield than a G-Sec, more stability than a stock. They are income instruments, not wealth-creation engines.
Their defining behaviour is in a crisis. In the March 2020 COVID crash, the Nifty fell about 38% while AAA corporate bond prices dropped only 3-5% and G-Secs actually rose. That volatility-dampening is the portfolio job bonds do, cushioning the debt allocation without the crash risk of equity.
Why They Pay More Than G-Secs
The Government of India controls the rupee and can, in extremis, print to repay rupee debt; a company cannot. That single asymmetry is why even AAA corporate bonds must offer a premium, compensation for credit risk, liquidity risk, and business-cycle exposure. The premium is risk pricing, never extra return for free.
The Spread Has Compressed
Historically, AAA corporate bonds yielded 1.5-2% more than G-Secs. After the RBI cut the repo rate by 125 basis points through 2025 to 5.25%, that spread has narrowed to just 0.12-0.82%, AAA bonds at 6.8-7.5% versus about 6.68% on the 10-year G-Sec.
What This Means For You
With bond yields overlapping bank FD rates of 6.25-8.0%, the reward for taking credit risk is unusually thin. On small amounts, an insured FD can be the better risk-adjusted choice today.
The Critical Distinction From FDs
Bank FDs carry DICGC insurance up to ₹5 lakh per depositor per bank and guarantee principal. Corporate bonds carry no insurance, if the issuer defaults, recovery depends on bankruptcy proceedings.
Who It Suits
Good Fit
Investors with Rs 20 lakh-plus of surplus, a 3-7 year goal, tolerance for moderate credit risk, and the discipline to monitor ratings quarterly.
Poor Fit
Anyone needing money within 1-2 years, unable to tolerate any default risk, or with too little capital to diversify across issuers.
Part III
The Two Core Risks
Credit risk, interest-rate risk, and the liquidity trap that catches even listed bonds.
Part III: The Two Core Risks · Page 8
1. Credit Risk
Credit risk is the danger the issuer cannot pay. It shows up three ways: a missed coupon (your income stops), a default on principal (you chase recovery through bankruptcy courts), or a downgrade (the rating drops, the market price falls, and the warning bell rings).
The IL&FS collapse is the defining lesson. Rated AAA in mid-2018, it defaulted on about Rs 91,000 crore of debt by September 2018 and was cut from AAA to D in under two months. Recovery has run below 50% even years later. DHFL followed in June 2019, freezing the whole NBFC market.
Why Ratings Fail
Ratings are backward-looking opinions, not guarantees; agencies are paid by issuers; and they are often slow to downgrade. Zee went from AA to BBB in 2023, Yes Bank from AA to BB in 2020. Treat AAA as low risk, never no risk.
Monitor ratings quarterly on the CRISIL, ICRA, or CARE websites. A cut from AAA to AA is a yellow flag; a fall to BBB or below is a red flag demanding an immediate decision to exit.
2. Interest-Rate Risk
Bond prices move inversely to interest rates, a mathematical certainty. Buy a ₹1 lakh bond at an 8% coupon; if new bonds are issued at 7%, yours becomes more valuable and rises toward ₹1,02,000; if new bonds pay 9%, yours falls toward ₹98,000.
Duration: Longer Maturity, Bigger Swings
A 1-year bond barely moves when rates change; a 10-year bond can swing 8-10% for a 1% shift. A 5-year, 8% bond has a duration near 4.2 years, so a 1% rate rise cuts its price about 4.2%.
3. Liquidity Risk
The quiet third risk. Even "listed" corporate bonds often trade in tiny volumes, you may find no buyer, or be forced to accept a 5-10% discount. In the IL&FS crisis, bid-ask spreads blew out and even AAA bonds became hard to sell. Listing status does not guarantee liquidity; assume you may need to hold to maturity.
Part IV
Taxation in India
Coupon at slab, listed capital gains at 12.5%, and why unlisted bonds lost their advantage.
Part IV: Taxation in India · Page 10
Coupon Interest: Taxed at Slab
Coupon income is taxed as "Income from Other Sources", added to your total income and taxed at your marginal slab. There is no Section 80C deduction. TDS of 10% applies if interest from a single issuer exceeds ₹5,000 in a year for resident individuals. This is identical to how a bank FD's interest is taxed, no advantage either way.
Worked Example
Earn ₹75,000 coupon (7.5% on ₹10 lakh) in the 30% bracket: tax is ₹22,500, leaving ₹52,500. The 7.5% pre-tax yield becomes a 5.25% post-tax yield.
The interesting part is capital gains, and here the listed-versus-unlisted split changes everything. Finance Act 2023, confirmed in Budget 2026, removed indexation for all debt securities and stripped unlisted bonds of any long-term benefit.
Listed Bonds
Held over 12 months: long-term, taxed at 12.5% without indexation. Under 12 months: short-term, taxed at your slab. Held to maturity, there is no capital-gains event at all, only coupon tax.
Unlisted Bonds
Capital gains taxed at slab rate regardless of holding period, treated like debt-fund gains after April 2023. No LTCG benefit at all, avoid unless the yield premium is large.
Corporate Bonds vs Bank FDs
For someone in the 30% bracket investing ₹10 lakh, the comparison is sobering: interest tax is identical, and the bond's edge exists only on capital gains, and only if it is listed and sold before maturity.
| Instrument | Pre-Tax | Post-Tax Yield |
|---|---|---|
| Bank FD (7%) | 7% | 4.9% |
| Listed Bond (7%) | 7% | 4.9% coupon; gains at 12.5% |
| Unlisted Bond (7.5%) | 7.5% | 5.25%; gains at slab |
30% bracket, interest taxed annually. Illustrative. ADWIZR analysis.
Reporting
Interest appears in Form 26AS where TDS applies; declare it under Income from Other Sources. Report capital gains under the right head, 12.5% LTCG for listed bonds over 12 months, slab for unlisted, in your ITR.
Part V
How to Buy and Evaluate
Platforms and access, an evaluation checklist, and the mistakes that cost investors most.
Part V: How to Buy and Evaluate · Page 12
Where and How to Buy
RBI Retail Direct and exchanges
RBI Retail Direct offers direct access to government securities and select instruments; the NSE goBID and BSE Bond platforms carry primary and secondary corporate bonds, minimum around ₹10,000, through a demat account with regulatory oversight.
Bond platforms (aggregators)
SEBI-registered platforms such as GoldenPi, Wint Wealth, and BondsKart curate a wider, more retail-friendly selection with research tools, at slightly higher cost and still subject to real liquidity limits.
Broker or bank demat account
Most brokers and banks let you trade bonds through an existing demat account, convenient, but often with thin inventory and relationship managers pushing proprietary products.
The Costs
Expect demat maintenance (₹300-750/yr), brokerage (0.1-0.25%), 18% GST on brokerage, DP charges on sale, and stamp duty (0.015%). On a ₹2 lakh purchase that is about ₹384, roughly 0.19%, but on a ₹10,000 ticket the same costs balloon to 3.8%.
Common Mistakes
Chasing yield, ignoring credit
A 10% bond in a 6.8-7.5% AAA world is likely BBB or below. IL&FS offered attractive yields before wiping out 50-70% of principal. The extra 2-3% rarely covers the default risk.
Not monitoring ratings after buying
Ratings change quarterly. IL&FS, DHFL, and Zee all suffered multiple downgrades before collapse. Set a calendar reminder; if a bond falls to AA or below, review whether to sell.
Buying unlisted for a slightly higher coupon
Unlisted bonds face near-zero liquidity and slab-rate tax on gains. A listed 7% bond usually beats an unlisted 7.5% one after tax for a 30% investor who may sell early.
Concentrating in one sector
Owning five NBFC bonds is not diversification. When IL&FS defaulted, the entire NBFC sector froze. Spread across PSUs, power, telecom, and manufacturing.
Panic-selling when rates rise
If you hold to maturity, a temporary 5-8% price drop is irrelevant, you still get face value. Sell only if credit quality genuinely deteriorates.
The Deepest Trap
Assuming AAA means "no risk" and putting a large share of your portfolio in one issuer. IL&FS was AAA weeks before default. Cap single-issuer exposure at 10% and keep an emergency fund elsewhere.
Part VI
The Verdict
Where corporate bonds belong, and the decision rules that keep you out of trouble.
Part VI: The Verdict · Page 14
The Assessment
A corporate bond is a loan to a company: predictable coupons, principal back at maturity, and a yield a little above the sovereign, so long as the issuer stays solvent. It is a structured income instrument, not a guarantee, not an equity substitute, and not risk-free. Its whole character sits in the middle of the risk spectrum.
Before bonds belong anywhere, secure the basics: an emergency fund of 6-12 months, insurance, and no high-interest debt. Then use corporate bonds for the income portion of a plan with a 3-7 year horizon, matching each bond's maturity to a real goal so interest-rate risk fades and only credit risk remains to be managed.
"With the AAA spread over G-Secs down to 0.12-0.82% and FD rates overlapping bond yields, the reward for credit risk is unusually thin. Demand that a bond earn its place, do not assume it."
The Opportunity Cost
Below Rs 20 lakh: use a corporate bond fund or target maturity fund for diversification. Rs 20-50 lakh: a hybrid of a fund plus a few listed bonds. Above Rs 50 lakh: a diversified ladder of 8-10 listed issuers can earn its keep on cost and tax efficiency.
ADWIZR · July 2026
Decision Rules
Stick to AAA or AA, and listed
Investment grade for safety, listed for the 12.5% LTCG rate and transparency. Avoid unlisted bonds unless the yield premium is large enough to justify slab-rate tax and zero liquidity.
Match maturity to the goal, then hold
Buy a bond that matures when you need the money and interest-rate risk largely disappears. Sell early only if credit quality deteriorates, not because prices wobble.
Diversify and monitor
Never more than 10% in one issuer or 20% in one sector. Check ratings quarterly on CRISIL, ICRA, and CARE; exit on a fall to BBB or below.
The Bottom Line
Corporate bonds are predictable income with credit risk attached, a middle layer between G-Secs and equity. Right now the premium over government bonds is thin, so the bar is high. Buy listed, AAA or AA bonds; match maturity to your goal; diversify across issuers; monitor ratings quarterly; and keep an emergency fund elsewhere. Done that way they add steady income. Done carelessly, one IL&FS can undo years of it.
Investor FAQ
Questions Indian Investors Ask
Seven questions, answered directly.
Investor FAQ · Page 16
Frequently Asked Questions
Q1 Can I lose money in AAA-rated corporate bonds?
Q2 How do corporate bond yields compare to bank FDs today?
Q3 What happens if a company defaults on my bond?
Q4 How are corporate bonds taxed, listed versus unlisted?
Q5 Should I buy individual bonds or a bond fund?
Q6 How do corporate bonds perform in market crashes?
Q7 What is the minimum needed to invest in corporate bonds?
Key Terms & Definitions
Corporate Bond
A tradable debt security through which an investor lends money to a company in exchange for a fixed coupon and the return of principal at maturity. The holder is a creditor, not a shareholder, with a contractual claim ranking ahead of equity in a default.
Coupon
The fixed rate of interest a bond pays on its face value, usually annually or semi-annually. A ₹1 lakh bond with an 8% coupon pays ₹8,000 a year. The coupon is set at issue and does not change with market rates.
Yield to Maturity (YTM)
The total annualised return an investor earns by buying a bond at its current market price and holding it to maturity, accounting for coupons and any gain or loss versus face value. YTM, not the coupon, is the correct figure to compare across bonds.
Credit Risk
The risk that a bond issuer fails to pay interest or principal on time, or is downgraded. It is the defining risk of corporate bonds and the reason they yield more than government securities. It cannot be eliminated by holding to maturity.
Interest-Rate Risk
The risk that a bond's market price falls when market interest rates rise, since prices move inversely to rates. Longer-maturity bonds are more sensitive. The risk affects you only if you sell before maturity; hold to maturity and you receive face value.
Duration
A measure of a bond's price sensitivity to interest-rate changes, expressed in years. A duration of 4.2 means a 1% rise in rates cuts the price about 4.2%. Longer maturities carry higher duration and larger price swings.
Credit Rating
An opinion on an issuer's ability to repay, assigned by agencies such as CRISIL, ICRA, CARE, and India Ratings on a scale from AAA (highest safety) down to D (default). Ratings are backward-looking and can change quickly, so they must be monitored.
Listed vs Unlisted Bond
A listed bond trades on a stock exchange, offering transparency and a 12.5% LTCG tax rate on gains held over 12 months. An unlisted bond is privately placed, with poor liquidity and, after Finance Act 2023, capital gains taxed at slab rate regardless of holding period.