Retail investors have taken a liking to investing in bonds due to the ease in purchase through the RBI Retail Direct platform and even multiple bond investment aggregators available, namely Indiabonds, Jiraaf, Goldenpi, Fixedincome etc.
But with the tax filing deadline nearing, chartered accountants are facing a dilemma on the taxation math for bonds, especially those purchased online through exchanges.
What’s the complexity?
Bonds can be purchased at two stages – first is during a fresh issuance, second is through a stock exchange sale, where the bond is listed to offer liquidity until it matures.
If one purchases bond units during a fresh purchase and holds it till maturity, then they pay 20% short-term capital gains tax (purchases after April 1, 2023) on the bond value appreciation and tax bracket rate for the interest payment. But when one purchases during fresh issuance and sells it before maturity on the stock exchange, then the amount involved in the transaction process leaves room for one to fathom the value of bond and the interest.
“When one purchases a bond, how should one bi-furcate the amount received between bond value and interest amount. This is because the bond appreciation value and amount of interest are clubbed together in the price, without notifying the exact amount in the contract note,” says Paras Savla, partner at KPB & Associates.
As a result, we are facing issues in determining the exact amount to be claimed under the short-term capital gains for taxation, Savla adds.
Premium payment and interest
Mumbai-based chartered accountant Mehul Sheth, says, “When bonds are purchased from the open market, the buyer pays a premium for the purchase over and above the bond’s price.”
Sheth, however, questions whether the premium paid would result in a capital gain or be considered interest needs to be clarified as the taxation rates are different for both categories.
Interest
Similarly, bonds generate two types of income for the investor: the appreciation in the bond’s value and the interest earned for the holding period. To further complicate the matter, the interest amount can be taxed when it is accrued (accumulated on the investment but not handed over) or when it is received in the hands of an investor.
Interest is credited to the bondholder during the quarterly, half-yearly or yearly cycles. While a buyer might have purchased the bond mid-way through the year, the interest has already been accrued to the old buyer.
So the concern among tax professionals is – how should the interest amount be split for the period held between the bond purchaser and bond seller due to the uneven period of holding?
“During a bond unit purchased through the market, for instance, in the month of October 2024, say of ₹100 per unit, one isn’t sure whether the interest that the first buyer has accrued between September 2024 and October 2024 has been accounted for and in what ratio,” says Savla.
Consider the case of Laila, who purchases a bond at ₹100 and offers the interest payment of ₹5 for the remaining period of the year to Nisha.
“Will this ₹5 be accounted as capital gain for Nisha, or as interest, is a perplexing question we are facing. If the interest amount is not paid by Laila, then will that be accounted as a capital loss for Nisha?” asks Sheth.
Sourcing Transaction Details
Also, finding the capital account statement for the sale and purchase of bonds is a tad bit difficult. Unlike a common account statement in mutual funds and stock market transactions, there isn’t a common account statement that investors have for bond investments.
“The broker would be offering the statement of account based on the contract note. The same details are reflected in the Annual Information Statement. Even though the details are specified in a better manner as compared to Futures and Options trades, it is still insufficient,” says Sheth.
Delay in return processing
While one purchases and sells during the whole year, transactions are reported in the Annual Information Statement and Form 26AS, where all transactions and the taxes paid against them by various entities across India are mentioned.
If the tax collector’s amount and receiver’s numbers do not match, then returns are processed with a delay or may be stuck due to technological intervention.
“There is a mismatch in the amount mentioned in the Form 26AS or annual information statement (AIS) based on the TDS deducted on the interest. If we follow the amount mentioned in the AIS and ignore the actual figures derived, then there are chances the tax department might raise a query while processing tax returns and delay the whole process,” says Savla.
If the ambiguity is corrected through the contract note clarification in the transaction statement, then all those who are involved – the bond buyer, bond seller and the tax professional would save the hassle of chasing the return rectification process, which is time-consuming.
Disclaimer: This story is for educational purposes only. The views and recommendations expressed are those of individual analysts or broking firms, not Mint. We advise investors to consult with certified experts before making any investment decisions, as market conditions can change rapidly and circumstances may vary.
