Bonds are government securities issued by the government of India to borrow money from investors. A debenture is an interest-bearing bond or unsecured loan issued by a Company. If you have invested in bonds or debentures, you need to file your ITR and pay tax on the income. Sale of Bonds and Debentures is considered to be a Capital Gains Income. As per the Income Tax Act, both Bonds and Debentures are considered as Securities.
Types of Bonds in India include government bonds, taxable and tax-free bonds, sovereign gold bonds, capital gains bonds by NHAI & REC, IRFC tax-free bonds, etc. Types of Debentures in India include market linked debentures, non-convertible and convertible debentures, secured and unsecured debentures, redeemable and irredeemable debentures, registered and bearer debentures. SEBI (Securities Exchange Board of India) has prescribed guidelines for public issue of debentures under ICDR Regulations.
Income Heads for Income from Bonds & Debentures
Capital Gains on Sale of Bonds & Debentures
Period of Holding means the time period for which the assessee held the capital asset. The period of holding is counted from the date of acquisition (purchase) of an asset to the date of transfer (sale) of assets.
The period of holding is used to determine the nature of income on the sale of the capital asset i.e. Long Term Capital Gain or Short Term Capital Gain. Eg: If the assessee sells listed bonds within 12 months from the date of purchase, it is considered as a Short Term Capital Gain (STCG).
|Type of Asset||Period of Holding||Capital Gains|
|Listed Bonds & Debentures||Less than 12 months||Short Term Capital Gains|
|Listed Bonds & Debentures||More than 12 months||Long Term Capital Gains|
|Unlisted Bonds & Debentures||Less than 36 months||Short Term Capital Gains|
|Unlisted Bonds & Debentures||More than 36 months||Long Term Capital Gains|
IFOS Income from Bonds & Debentures
Interest Income from Bonds and Debentures is taxable under the head ‘Income from Other Sources‘ i.e. IFOS. The Interest Income is taxed at slab rates. If the assessee has incurred an expense (like commission or fees or remuneration etc) to realize such Interest, it can be claimed as a deduction from the Interest Income.
Interest Income from Tax-free bonds is fully exempt. Tax-free bonds are the bonds issued by public undertakings like National Highway Authority of India, Rural Electrification Corporation, NTPC Limited and Indian Railways, Indian Renewable Energy Development Agency, Housing and Urban Development Corporation, Power Finance Corporation and Rural Electrification Limited.
Income Tax on Bonds & Debentures
Income Tax on Trading in Bonds & Debentures is similar to the tax treatment of other capital assets. Following are the income tax rates:
Income Tax on Sale of Bonds & Debentures
|Type of Asset||Capital Gains||Tax Rate|
|Listed Bonds & Debentures||Short Term Capital Gains||Slab Rate|
|Listed Bonds & Debentures||Long Term Capital Gains||10% without Indexation under Section 112|
|Unlisted Bonds & Debentures||Short Term Capital Gains||Slab Rate|
|Unlisted Bonds & Debentures||Long Term Capital Gains||20% without Indexation under Section 112|
Note: Assessee cannot take benefit of indexation for the Long Term Capital Gain (LTCG) on the sale of Bonds or Debentures. However, the indexation benefit is available on Capital Indexed Bonds (issued by the Government) and Sovereign Gold Bonds (issued by the RBI under the Sovereign Gold Bond Scheme, 2015).
Income Tax on Other Income from Bonds & Debentures
Interest Income from Bonds & Debentures is taxed as per slab rates. Usually, the interest on bonds is taxable income. However, in the case of tax-free bonds, the interest income is exempt from tax.
An investor who invests in tax-free bonds should calculate the pre-tax yield before making the investment decision. To calculate the pre-tax yield, use this formula – ROI / (100-TR) * 100. (TR means Taxable Rate)
Tax-Free Bonds has an interest rate of 5%. Let us assume that the investor falls in tax slab of 30%. Whether he/she invest in the tax-free bond?
Effective Tax Rate – 30% + 4% Cess = 31.2%
Calculate the pre-tax yield = 5% / (1-31.2%) = 7.16%
Thus, an investor who pays 31.2% tax, making an investment in a taxable bond with 7.16% interest is the same as investing in a tax-free bond with 5% interest.
Capital Gains Exemption under Section 54EC
An assessee who has sold Long Term Capital Asset like land or building or both can claim exemption by investing in NHAI or REC Bonds. The amount of exemption will be lower of:
- Cost of NHAI or REC Bonds
- Capital Gain on sale of land or building or both
The taxpayer can claim the capital gain exemption under Section 54EC of the Income Tax Act to reduce the tax liability.
ITR Form, Due Date and Tax Audit for Investors of Bonds & Debentures
- ITR Form: Trader should file ITR-2 (ITR for Capital Gains Income) on Income Tax Website if income is treated as Capital Gains.
- Due Date
- Up to FY 2019-20
31st July – for traders to whom Tax Audit is not applicable
30th September – for traders to whom Tax Audit is applicable
- FY 2020-21 Onwards
31st July – for traders to whom Tax Audit is not applicable
31st October – for traders to whom Tax Audit is applicable
- Up to FY 2019-20
- Tax Audit: Since the income is treated as Capital Gains, the applicability of tax audit under Section 44AB need not be determined.
Carry Forward Loss from Sale of Bonds & Debentures
- Short Term Capital Loss (STCL) can be set off against both Short Term Capital Gain (STCG) and Long Term Capital Gain (LTCG). The remaining loss can be carried forward for 8 years and set off against STCG and LTCG only.
- Long Term Capital Loss (LTCL) can be set off against Long Term Capital Gain (LTCG) only. The remaining loss can be carried forward for 8 years and set off against LTCG only.
Example for capital gains on sale of bonds & debentures
For example, Mr. Rahul is a salaried individual and has invested in listed bonds and debentures in FY 2019-20. His total salary income for a year is INR 8,70,000. And has Short Term Capital Loss of Rs. 30000 and Long Term Capital Gain of INR 1,50,000.
Now in the above example, Rahul needs to file ITR-2 for FY 2019-20. And his total income and tax liability will be as follows:
|Short Term Capital Loss||30000|
|Long Term Capital Gain||150000|
|Total Capital Gains after set-off of losses
(taxed @10% without indexation)
|Total Taxable Income||990000|
|Tax at slab rate||86500|
|Tax at special rate||12000|
|Total Income Tax||98500|
|Health & Education Cess @4%||3940|
|Total Tax Liability||102440|
The investor should file ITR-2 and report income from the sale of Bonds and Debentures as Capital Gains.
– Listed Bonds & Debentures – Tax on LTCG is 10% without indexation and tax on STCG is as per slab rates.
– Unlisted Bonds & Debentures – Tax on LTCG is 20% without indexation and tax on STCG is as per slab rates.
The trader can set off LTCL with LTCG and STCL with both STCG and LTCG. The remaining loss can be carried forward for 8 years.
Tax on Interest on SGB Bond
It is taxable at slab rates under the head IFOS (Income from Other Sources). TDS on Interest is not applicable since they are government securities.
Tax Treatment on Sale or Redemption
A. Individual Investor
Capital Gain on Redemption of SG Bond by an individual investor is exempt from tax since the definition of transfer as per Section 47 of the Income Tax Act excludes such redemption.
If the individual investor transfers the SG Bond by selling it on the stock exchange, it is taxable as LTCG at the rate of 20% with an indexation benefit.
B. Other Investors – The redemption or transfer of SG Bond in case of investors other than individuals is taxed at slab rates if STCG and at 20% with indexation benefit if LTCG.
If the bonds are purchased at a discounted price and redeemable at par are held till maturity then the difference between invested value and redemption value will be taxed under income from capital gains.
Whereas, when the bonds are purchased and redeemable at par are held till maturity then no capital gain shall arise on redemption in this case.