Section 10(15)(vii): Tax Exemption on Interest from Specified Bonds
Under Section 10(15)(vii) of the Income-tax Act, 1961, interest on qualifying bonds issued by a local authority or a State Pooled Finance Entity and specified by the Central Government could be exempt from income tax. The exemption is tied to the particular bond issue and its statutory notification, not to all municipal or government-related bonds.
Reviewed 10 October 2026. Section references below relate to the Income-tax Act, 1961. The Income-tax Act, 2025 took effect from 1 April 2026; for income governed by the new Act, consult its applicable provisions, transitional rules and notifications.
Meaning and scope of Section 10(15)(vii)
Section 10 is the list of incomes excluded from total income, subject to specific conditions. Clause (15) addresses specified categories of interest and similar receipts. Sub-clause (vii) covered interest payable on bonds issued by a local authority or a State Pooled Finance Entity, where the Central Government specified the bonds by notification in the Official Gazette.
| Eligible assessee | All classes of taxpayers, subject to the terms of the applicable exemption and issue. |
|---|---|
| Nature of income | Interest on qualifying bonds issued by a local authority or State Pooled Finance Entity. |
| Exemption | The qualifying interest amount, where all statutory and notification conditions are met. |
| Essential test | The specific bond must be covered by a valid Central Government notification. |
| Applicable law | Section 10(15)(vii) of the Income-tax Act, 1961 for years to which that Act applies; review the Income-tax Act, 2025 for later tax years. |
What is a local authority or State Pooled Finance Entity?
A local authority generally refers to a legally constituted body entrusted with local civic administration, subject to the statutory definition relevant to the tax provision. A State Pooled Finance Entity is an entity established for pooling financing needs, often to help urban local bodies access debt funding for public infrastructure. These descriptions do not replace the legal definitions or notification conditions for a particular bond.
Conditions for claiming the exemption
- Qualifying issuer: The bonds must be issued by an eligible local authority or State Pooled Finance Entity.
- Government specification: The particular bonds must be specified by the Central Government through the relevant notification in the Official Gazette.
- Qualifying receipt: The amount claimed must be interest on those bonds, not an unrelated return or capital gain.
- Evidence: Retain the bond allotment document, issue terms, interest certificate or statement and the applicable notification.
- Relevant tax year: Check the statute and rules governing the year in which the interest is taxable or exempt.
How much interest is exempt?
Where the bonds and interest satisfy the provision and the applicable notification, the entire qualifying interest is exempt under the historical Section 10(15)(vii) framework. There is no general rupee ceiling stated in this clause; however, the notification and issue terms must be checked. Interest from non-notified bonds remains subject to the normal income-tax rules.
Example: qualifying versus ordinary bonds
Suppose an investor receives Rs. 24,000 interest from a specifically notified qualifying municipal bond and Rs. 18,000 from a different municipal bond that is not covered by the exemption. Under the 1961 Act framework, and assuming all applicable conditions are satisfied, the first Rs. 24,000 may be exempt under Section 10(15)(vii); the other Rs. 18,000 is not exempt merely because the issuer is a municipal body. This example is illustrative, not a determination of the status of any actual issue.
Interest exemption versus capital gains
The clause addresses interest. A profit from selling a bond or redeeming it at a premium may require separate analysis under the applicable capital gains or other income provisions. Do not assume that exemption of interest automatically exempts all proceeds from the investment.
How to verify a notified bond
- Identify the exact issuer, series, allotment date and security identification number from the bond documents.
- Check the prospectus or information memorandum for the relevant income-tax exemption notification.
- Cross-check the notification in the Gazette of India and the relevant tax legislation through the Income Tax Department or India Code.
- For current filings, refer to the official income-tax e-filing portal and applicable return instructions.
Frequently asked questions
Is interest from every municipal bond exempt?
No. The relevant bond must meet the statutory requirements and be covered by the applicable government specification or notification.
Who can claim the exemption?
The historical clause was not restricted to salaried individuals. An eligible investor in a qualifying bond could claim it, subject to the statutory conditions.
Is the entire interest exempt?
Qualifying interest could be fully exempt under Section 10(15)(vii), but the precise bond and tax-year requirements must be satisfied.
Does this page cover the Income-tax Act, 2025?
It explains the original Section 10(15)(vii) provision under the 1961 Act. The corresponding treatment for tax years beginning on or after 1 April 2026 should be verified under the 2025 Act and current notifications rather than assuming identical section numbering.
Related income-tax reading
See the site's overview of Section 10 exempt incomes, guide to tax-free income and Chapter VI-A deductions guide. Exempt income and deductions are distinct concepts.
This article provides general information, not investment or tax advice. Check the original notification, bond documents and the legislation governing your tax year.