It is very important for an investor to look at Post-Tax Returns when screening the universe of investment opportunities. Let us help you understand the taxation impact of various investments made in the world of Bonds & Debentures.
1. Tax on interest received from taxable bonds
According to the income tax act of 1961, the interest earned from bonds will be taxed at the slab rate that you fall under as per your overall income. The income should be listed under the ‘Income from Other Sources’ section in your income tax computation.
Another factor to consider while investing in taxable bonds is whether you will receive the interest payments at periodic intervals or whether the interest is payable in bulk at the time of maturity.
In the case of cumulative bonds, the interest is to be accounted for on an annual basis. This also helps in avoiding high tax liability due to receipt of large income at maturity.
(Note: Bonds that pay interest payment only on maturity are called zero-coupon bonds)
2.Tax on interest from Tax-Free Bonds
The interest earned is completely tax-free, in case of tax-free bonds.
|TYPE OF SECURITY||HOLDING PERIOD TO QUALIFY AS A LONG-TERM ASSET||TAXABILITY OF SHORT-TERM CAPITAL GAINS||TAXABILITY OF LONG-TERM CAPITAL GAINS|
|Listed debentures and bonds *||More than 12 months||Gains shall be taxed as per normal slab rates||Gains shall be taxed @ 10% without indexation|
|Unlisted debentures and bonds *||More than 36 months||Gains shall be taxed as per normal slab rates||Gains shall be taxed @ 20% without indexation|
|Units of debt oriented mutual funds||More than 36 months||Gains shall be taxed as per normal slab rates||Gains shall be taxed @20% after giving effect of indexation|
* except capital indexed bonds issued by the Government & Sovereign Gold Bond issued by the Reserve bank of India under the Sovereign Gold Bond Scheme, 2015
The relevant provisions in this regard are as follows:
1. Section 2(42A)
Note: Period of holding refers to the time span for which an asset is held by a person, immediately prior to its transfer. It shall be computed from the date on which the asset was acquired until the date of its transfer.
2. Third Proviso to Section 48
This proviso states that indexation shall not apply to the long-term capital gain arising from the transfer of bonds or debentures.
However, it shall apply to -
Note: Indexation is not applicable to any short-term capital gains.
3. Section 112
The tax payable on long-term gains (LTCG) arising from transfer of:
a. Listed debentures and bonds (except 2a and 2b) shall be lower of-
Thus, the LTCG in this case shall always be taxed at 10% without indexation.
b. Unlisted debentures and bonds (except 2a and 2b) shall be-
20% of LTCG without giving effect of indexation
c. Units of debt oriented mutual funds shall be-
20% of LTCG after giving effect of indexation
4. Section 111A
Short-term gains (STCG) arising from transfer of all of these shall be taxable at the normal slab rates applicable to the person.
Taxation of capital indexed bonds issued by the government and sovereign gold bonds issued by RBI
1. The tax payable on long-term gains (LTCG) arising from transfer of these being:
A. Listed bonds shall be lower of-
B. Unlisted bonds shall be-
2. Short-term gains (STCG) arising from transfer of all of these shall be taxable at the normal slab rates applicable to the person.