The Market is flooded with Tax free bonds with reasonable coupon rates .
The term of these bonds are 10 years , 15 years and 20 years .
These bonds are secured and non-convertible bond (NCD).
Tax benefit / treatment of these bonds for various persons under Income Tax on Interest , Income tax for capital gain , Gift tax , wealth tax and TDS provisions .
Before investing money in Tax free bonds, you should study the term of Tax free bonds on aspects other than tax also.
Under the current tax laws, the following tax benefits available to subscriber of Tax free Bonds
INCOME TAX
Interest from Tax free Bonds Exempted from Income Tax and TDS (Tax Deduct at Source) not applicable.
As per section 10 (15) (iv) Interest from tax free bonds is exempted from Income Tax .
In exercise of power conferred by item (h) of sub clause (iv) of clause (15) of Section 10 of the Income Tax Act, 1961 (43 of 1961) the Central Government vide Notification NO. 61/2013.F.No.178/37/2013-(ITA.1) dated 8th August, 2013 authorizes India Infrastructure Finance Company Limited to issue through a Public/Private Issue, during the Financial year 2013-14, tax free, secured, redeemable, non convertible bonds for the aggregate amount not exceeding Rs. 10,000 crore
Accordingly, pursuant to the aforesaid notification, interest from IIFCL bond will be exempt from income tax.
Since the interest Income on these bonds is exempt, no Tax Deduction at Source is required.
However interest on application money would be liable for TDS as well as tax as per present tax laws.
CAPITAL GAIN
Long Term capital Gain
Under Section 2 (29A) of the I.T. Act, read with section 2 (42A) of the I.T. Act, a listed Bond is treated as a long term capital asset if the same is held for more than 12 months immediately preceding the date of its transfer.
Under Section 112 of the I.T. Act, capital gains arising on the transfer of long term capital assets being listed securities are subject to tax at the rate of
20 % of capital gains calculated after reducing indexed cost of acquisition or
10 % of capital gains without indexation of the cost of acquisition.
The capital gains will be computed by deducting expenditure incurred in connection with such transfer and cost of acquisition/indexed cost of acquisition of the bonds from the sale consideration.
However as per 3rd proviso to Section 48 of Income Tax Act, 1961 benefits of indexation of cost of acquisition under second proviso of Section 48 of Income Tax Act, 1961 is not available in case of bonds and debenture, except capital indexed bonds.
Thus, long term capital gain tax can be considered at a rate of 10% on listed bonds without indexation.
STT (Securities Transaction Tax)is not applicable on transactions in the Bonds :
Securities Transaction Tax (“STT”) is a tax being levied on all transactions in specified securities done on the stock exchanges at rates prescribed by the Central Government from time to time. STT is not applicable on transactions in the Bonds.
Tax Rates for individual / HUF :
In case of an individual or / HUF, being a resident, where the total income as reduced by the long term capital gains is below the maximum amount not chargeable to tax i.e. Rs.2 lakh resident individual / HUF, Rs..2.5 lakh in case of resident senior citizens of 60 or more years of age (on any day of the previous year) and Rs.5 lakh in case of resident super senior citizens of 80 years or more of age (on any day of the previous year), the long term capital gains shall be reduced by the amount by which the total income as so reduced falls short of the maximum amount which is not chargeable to income-tax and at the option of assesse the tax on the balance of such long-term capital gains shall be computed at the rate of 10% in accordance with and the proviso to sub-section (1) of section 112 of the I.T. Act read with CBDT Circular 721 dated September 13, 1995 or 20 % with indexation of cost , as the case may be.
A 2 % education cess and 1 % secondary and higher education cess on the total income tax (including surcharge for corporate only) is payable by all categories of tax payers.
Short-term capital gains on the transfer of listed bonds
Short-term capital gains on the transfer of listed bonds, where bonds are held for a period of not more than 12 months would be taxed at the normal rates of tax in accordance with and subject to the provision of the I.T. Act.
The provisions related to minimum amount not chargeable to tax, surcharge and education cess described at para(a) above would also apply to such short-term capital gains.
Tax Exemption under Section 54EC
Under Section 54 EC of the I.T. Act and subject to the conditions and to the extent specified therein, long term capital gains arising to the bondholders on transfer of their bonds in the company shall not be chargeable to tax to the extent such capital gains are invested in certain notified bonds within six months from the date of transfer.
If only part of the capital gain is so invested, the exemption shall be proportionately reduced.
However, if the said notified bonds are transferred or converted into money within a period of three years from their date of acquisition, the amount of capital gains exempted earlier would become chargeable to tax as long term capital gains in the year in which the bonds are transferred or converted into money.
Where the benefit of Section 54 EC of the I.T. Act has been availed of on investments in the notified bonds, a deduction from the income with reference to such cost shall not be allowed under Sec 80 C of the I.T. Act.
For purpose of availing exemption from tax on Capital gains, The investment made in the notified bonds by an assessee in any financial year cannot exceed Rs. 50.00 lakh.
Tax Exemption under Section 54F
As per the provisions of Section 54F of the Income Tax Act, 1961 and subject to conditions specified therein, any long-term capital gains (not being residential house) arising to Bondholder are exempt from capital gains tax
if the entire net sales considerations is utilized, in purchase of a new residential house or
within a period of one year before, or
two years after the date of transfer,
if the entire net sales considerations is utilized in construction of residential house within three years from the date of transfer
If part of such net sales consideration is invested within the prescribed period in a residential house, then such gains would be chargeable to tax on a proportionate basis.
Available to person who is an individual or Hindu Undivided Family
Provided that the said Bondholder should not own more than one residential house other than the new asset, on the date of such transfer or purchase any residential house, other than the new asset, within a period of one year after the date of such transfer of construct any residential house, other than the new asset, within a period of three years after the date of such transfer on which the income is chargeable under " Income from House Property ".
If the residential house in which the investment has been made is transferred within a period of three years from the date of its purchase or construction, the amount of capital gains tax exempted earlier would become chargeable to tax as long term capital gains in the year in which such residential house is transferred.
Similarly, if the Bondholder constructs/purchase within a period of three years after the date of transfer of capital asset, another residential house (other than the new residential house referred above), then the original exemption will be taxed as capital gains in the year in which the additional residential house is acquired.
Long / Short term Capital gain tax rates for FII
The income by way of short term capital gains or long term capital gains (not covered under Section 10(38) of the Act) realized by Foreign Financial Institutions on sale of security in the Company would be taxed at the following rates as per Section 115AD of the Act.
Short term capital gains- 30% (plus applicable surcharge and education cess)
Long term capital gains- 10% without cost of indexation (plus applicable surcharge and education cess)
As per section 90 (2) of the Act, the provision of the Act would not prevail over the provision of the tax treaty applicable to the nonresident to the extent such tax treaty provisions are more beneficial to the non resident.
Thus, a non resident can opt to be governed by the beneficial provisions of an application tax treaty.
TDS on payment made to Non Residents / or FII
Under Section 195 of Income Tax Act, Income Tax shall be deducted from sum payable to Non-Residents on long term capital gain and short term capital gain arising on sale & purchase of bonds at the rate specified in the Finance Act of the relevant year or / the rate or rates of the income tax specified in an agreement entered into by the Central Government under section 90, or / an agreement notified by the Central Government under section 90A, as the case may be.
However under section 196D, No deduction of tax shall be made from income arising by way of capital gain to Foreign Institutional Investors.
Bonds held as Stock in Trade
In case the Bonds are held as stock in trade, the income on transfer of bonds would be taxed as business income or / loss in accordance with and subject to the provisions of the I.T. Act.
Taxation on gift
As per section 56 (2) (vii) (c) of the I.T. Act, in case where individual or / Hindu undivided Family receives bond from any person on or / after 1st October, 2009
A. without any consideration, aggregate fair market value of which exceeds Rs. 50,000 (fifty thousand rupees) , then the whole of the aggregate fair market value of such bonds / debentures / or;
B. for a consideration which is less than the aggregate fair market value of the Bond by an amount exceeding Rs. 50,000 (fifty thousand rupees), then the aggregate fair market value of such property as exceeds such consideration; shall be taxable as the income of the recipient.
Provided further that this clause shall not apply to any sum of money or any property received
a) from any relative; / or
b) on the occasion of the marriage of the individual; / or
c) under a will or by way of inheritance; / or
d) in contemplation of death of the payer or / donor, as the case may be; / or
e) from any local authority as defined in the Explanation to clause (20) of section 10; / or
f) from any fund or foundation or university or other educational institution or hospital or other medical institution or any trust or institution referred to in clause (23C) of section 10; / or
g) from any trust or institution registered under section 12AA.
WEALTH TAX
Wealth-tax is not levied on investment in bond under section 2 (ea) of the Wealth-tax Act, 1957.
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