Banking Panel May Review Bond Tax Rules To Improve SME Credit Access

The high-level banking committee announced in Budget 2026 is likely to examine measures aimed at improving financing access for small and medium enterprises through India’s corporate bond market, according to a Moneycontrol report citing government officials.

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The panel is expected to study ways to expand the secondary market for SME financing and increase participation of smaller firms in bond issuances.

Officials quoted in the Moneycontrol report said most corporate bond issuances in India currently come from highly rated companies, limiting access for SMEs seeking long-term funding.

SME Participation In Bond Market Remains Limited

According to NITI Aayog data cited in the report, India’s corporate bond market expanded from ₹17.5 lakh crore in FY15 to ₹53.6 lakh crore in FY25, recording an annual growth rate of nearly 12%. The market currently accounts for around 15%-16% of India’s GDP.

Government officials cited by Moneycontrol said more than 95% of bond issuances are undertaken by top-rated companies, while SMEs continue to remain underrepresented in the market.

As per official data mentioned in the report, outstanding bank credit to MSMEs accounted for nearly 19% of total credit as of March 2024.

Tax Changes And Securitisation Under Review

Officials told Moneycontrol that the committee may examine changes to the taxation structure for corporate bonds to improve investor participation in SME debt instruments.

Under current tax rules, listed bonds sold within 12 months are taxed according to an individual’s income tax slab. Listed bonds held for more than 12 months attract 12.5% tax without indexation. Unlisted bonds are taxed at the individual’s applicable slab rate.

The panel is also expected to review securitisation structures for SME bond issuances. Officials quoted in the report said pooling smaller issuances through pass-through certificates may help improve scale and liquidity in the market.

Credit Enhancement Measures Likely

The committee may also study stronger credit enhancement support through institutions such as the Credit Guarantee Fund Trust for Micro and Small Enterprises, SIDBI, and the National Credit Guarantee Trustee Company.

Officials cited by Moneycontrol said the objective is to improve the credit profile of SME bonds and widen participation from institutional investors.

The government is also considering the possibility of a dedicated SME bond platform with lower Electronic Book Provider thresholds to enable smaller issuances to access the market.

Long-Term Investors May Get Wider Bond Options

Officials told Moneycontrol that insurers, pension funds, and retirement funds may eventually receive a broader investment universe beyond highly rated AA corporate debt if guarantee structures and disclosure frameworks are strengthened.

The report also cited Tejas Desai, Partner and Financial Services Tax Leader at EY India, who said taxation provisions introduced after the July 2024 Budget reduced the attractiveness of bond investments, including unlisted debentures and rupee-denominated corporate bonds for FPIs.

The high-level banking committee is expected to examine these proposals and may submit recommendations related to SME financing and corporate bond market reforms to the concerned departments.