The Budget in July had introduced several amendments to taxation. It’s been a couple of weeks since then and one area where there still seems to be some ambiguity is in the interpretation as to how capital gains on bonds are taxed under the current and proposed scenarios. While there may be differing views, here’s our take.
Bonds are capital assets and any gains made on their sale are taxed as capital gains. To ascertain how your bonds will be taxed, you need to have clarity on three aspects:
1. Period of holding (short-term or long-term),
2. If long-term, then whether indexation is available or not, and
3. The tax rate
Here we have analysed the capital gain taxation for listed and unlisted bonds (not being zero coupon bonds) and market-linked debentures.
Listed bonds
Listed bonds are basically those listed on a recognised stock exchange in India (NSE, BSE, for instance).
Current taxation: For a listed bond to qualify as a long-term capital asset, it must be held for more than 12 months (refer to A in accompanying table for citations). As far as indexation benefit is concerned, long-term bonds (both listed and unlisted) do not enjoy indexation (refer to B in accompanying table). Short-term capital assets do not enjoy indexation, and it very well applies to short-term bonds too. The tax rate in the case of long-term listed bonds is 10 per cent (refer C). Since there is no specific provision that taxes short-term bonds at concessional rates, short-term listed bonds are taxed at slab rates.
Proposed taxation: The tax rate alone is tweaked for long-term listed bonds. It has been taken up to 12.5 per cent (refer D). Short-term listed bonds continue to be taxed in the same manner as the current taxation.
Unlisted bonds
Unlisted bonds are those not listed on a recognised stock exchange in India.
Current taxation: For an unlisted bond to qualify as a long-term capital asset, it needs to be held for more than 36 months (refer E). As said above, long-term bonds, whether listed or not, do not enjoy indexation (refer B). Long-term unlisted bonds are taxed at 20 per cent (refer F). And since there is no specific provision that taxes short-term bonds at concessional rates, short-term unlisted bonds are taxed at slab rates.
Proposed taxation: Both long-term and short-term unlisted bonds are deemed as short-term capital assets (refer G). Hence, indexation benefit is not available. The amendments have not tweaked the status quo with respect to tax rates applicable for short-term unlisted bonds. Ergo, short-term unlisted bonds will continue to be taxed at slab rates.
Market linked debentures
Current taxation: Market linked debentures are deemed short-term capital assets (refer H) and capital gains arising from them are taxed as short-term capital gains at slab rates. This applies for all sales, redemptions and maturities of such debentures occurring in FY24 and subsequent FYs.
Proposed taxation: No amendment has been made to the status quo.
Note: The proposed taxation for all the cases seen above will have effect from July 23, 2024.