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Listed ncd - cumulative option - taxability on sale

Amol (Service) (65 Points)

18 August 2011

Hello members,

With many NCDs being available I have a question pertaining to taxability NCDs with cumulative option.

For such NCDs on tax is to be paid on accrued interest for every financial yr.

What if, after I pay tax for couple of years, I sell the NCDs on a stock exchange?

I saw a similar query answered here /experts/details.asp?mod_id=315360 saying that section 10(38) will apply and the tax will be NIL. But as far as I know Section 10 38 with NIL LTCG is applicable only for equity related securities and NCD is not one of them. For other instruments it was modified to 10% without indexation or 20% with indexation. If the answer in above query is wrong can a expert also post a reply to the above post?

Thanks for viewing/replying.

Amol

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9 Replies

praveen (Chartered Accountant) (6971 Points)
Replied 18 August 2011

Originally posted by : Amol
	Hello members, With many NCDs being available I have a question pertaining to taxability NCDs with cumulative option. For such NCDs on tax is to be paid on accrued interest for every financial yr. What if, after I pay tax for couple of years, I sell the NCDs on a stock exchange? I saw a similar query answered here /experts/details.asp?mod_id=315360 saying that section 10(38) will apply and the tax will be NIL. But as far as I know Section 10 38 with NIL LTCG is applicable only for equity related securities and NCD is not one of them. For other instruments it was modified to 10% without indexation or 20% with indexation. If the answer in above query is wrong can a expert also post a reply to the above post? Thanks for viewing/replying. Amol

If you carefully read the wordings of Section 10(38) you will understand that it not only includes equity but also other securities and mutal funds against which security transaction tax has been levied.
In the case of NCD's also STT is levied and hence exemption on LTCG is available.

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Amol (Service) (65 Points)
Replied 18 August 2011

Praveen, thanks for the reply.

1. Yes I am aware that 10 - 38 is avalialble for non-equity securities. Thats why I said this " For other instruments it was modified to 10% without indexation or 20% with indexation"

2. By exemption do you mean NIL LTCG?

Further this question has more to do with double taxation as

1. one has already paid tax on accrued interest in previous financial years

2. one will have to pay it again on sale as the unit value will still reflect the accrued interest (albeit indirectly).

(Guest)

If you decide to sell the NCDs on the stock exchange, capital gains can also arise. If NCDs are sold with in a period of 12 months from the date of allotment, short term capital gains / loss (STCG) will arise and if you decide to sell NCDs after a period of 12 months, the resulting gain or loss is called long term capital gains / loss (LTCG).

While short term capital gains on sale of NCDs would be taxed at normal rates, long term capital gains on sale of NCD (a listed security) are taxed at concessional rates u/s 112 of IT Act.

Long term capital gains on listed securities are taxed at the rate of 10% without indexation or 20% with indexation whichever is lower. However, as the benefit of cost indexation is not available in case of bonds and debentures; therefore, long term capital gains from NCDs are always taxable @ 10.30 per cent (including education cess of 3%) without indexation.

(Guest)

Originally posted by : deepak
	If you decide to sell the NCDs on the stock exchange, capital gains can also arise. If NCDs are sold with in a period of 12 months from the date of allotment, short term capital gains / loss (STCG) will arise and if you decide to sell NCDs after a period of 12 months, the resulting gain or loss is called long term capital gains / loss (LTCG). While short term capital gains on sale of NCDs would be taxed at normal rates, long term capital gains on sale of NCD (a listed security) are taxed at concessional rates u/s 112 of IT Act. Long term capital gains on listed securities are taxed at the rate of 10% without indexation or 20% with indexation whichever is lower. However, as the benefit of cost indexation is not available in case of bonds and debentures; therefore, long term capital gains from NCDs are always taxable @ 10.30 per cent (including education cess of 3%) without indexation.

Agree with Deepak

CA Devender Chauhan (Group Financial Accountant) (1526 Points)
Replied 19 August 2011

Agree with Deepak....

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Amol (Service) (65 Points)
Replied 19 August 2011

Thanks Deepak for your reply.

I am not aware on how /experts/details.asp?mod_id=315360 could be corrected as it appears on top searches but can mislead investors. Can anyone reply to it with above answer.

Furhter the question on being doubly taxed on NCDs with cumulative option still remains unanswered for me. Let me give you a example of non-cumulative option and cumulative option:

Lets assume

Investment : 1000

Interest rate p.a. = 10%

Period : 3yrs

Investment date : 1-4-2011
Maturity date : 31-03-2014

NCD sale date : 1-4-2013

Non-cumulative option:
lets assume Interest is paid on 31-mar of every year

Interest paid on 2012-03-31 = 100
Accrued interest if any = 0 (interest is already paid)
Tax : 30 (assuming higest tax bracket)
*Projected Unit value on 2012-04-01 : 1000 (as interest accrued is already paid)

Interest paid on 2013-03-31 = 100
Accrued interest if any = 0 (interest is already paid)
Tax : 30 (assuming higest tax bracket)
*Projected Unit value on 2013-04-01 : 1000 (as interest accrued is already paid)
Sale of NCD on 2013-04-01 with unit value as 1000
LTCG = 0

Total tax paid : 60

Cumulative option:

Interest paid on 2012-03-31 = 0
Accrued interest if any = 100
Tax : 30 (assuming higest tax bracket)
*Projected Unit value on 2012-04-01 : 1100 (as interest accrued is not paid)

Interest paid on 2013-03-31 = 0
Accrued interest if any = 110
Tax : 33 (assuming higest tax bracket)
*Projected Unit value on 2013-04-01 : 1210 (as interest accrued is not paid)
Sale of NCD on 2013-04-01 with unit value as 1210
LTCG = (1210-1000)*10% = 21

Total tax = 84

* Assuming interest rates remain constant

So comparing the 2 options above I believe sale of NCD with cumulative option is being doubly taxed as one has already paid tax on accrued interest (gain which one never received!). Any thoughts on where my facts are wrong?

(Guest)

I am not a tax expert, so my answer may not be correct, but I will try to answer it.

There will be two portions, 1. interest income and 2. capital appreciation.

In case you don't sell in the market then capital appreciation would be zero.

The interest income will be treated as income from other sources. This will be taxed @ 30.9% assuming you are in highest slab

the benefit of cost indexation is not available in case of bonds and debentures; therefore, long term capital gains from NCDs are always taxable @ 10.30 per cent (including education cess of 3%) without indexation.

Amol (Service) (65 Points)
Replied 24 August 2011

Originally posted by : deepak
	I am not a tax expert, so my answer may not be correct, but I will try to answer it. There will be two portions, 1. interest income and 2. capital appreciation. In case you don't sell in the market then capital appreciation would be zero. The interest income will be treated as income from other sources. This will be taxed @ 30.9% assuming you are in highest slab the benefit of cost indexation is not available in case of bonds and debentures; therefore, long term capital gains from NCDs are always taxable @ 10.30 per cent (including education cess of 3%) without indexation.

The issue is in case of cumulative option, accrued interest being taxed is still reflected in the value of the NCD and this is further being taxed 9in case of sale). So even though one has not received any interest, he is paying tax on it and will be tax later on sale of NCDs.

Manish Shrivastava (Audit Manager) (22 Points)
Replied 06 September 2011

Dear Friends,

May this note or article published in business today will solve all your problems "https://businesstoday.intoday.in/story/non-convertible-debentures-fixed-deposits-better-returns/1/17254.html "

Taxation:-Interest accrued on company fixed deposits is added to the income under the head ‘income from other sources’ and taxed at a marginal rate. There are two ways in which you can earn from a listed NCD — interest and capital appreciation. Interest on NCD is taxed like the interest on a company FD. The highest rate at which interest on both the instruments can be taxed stands at 30.9%.

“If the NCD is listed on a recognised stock exchange and held for at least 12 months before selling, the capital appreciation enjoyed by an investor is taxed as long-term capital gain,” says Vikas Vasal, executive director, KPMG.

Long-term capital gains are taxed at 10.3% without indexation. Short-term capital gains are taxed at a marginal rate. If the NCD is listed on a stock exchange, there is no deduction of tax at source. Interest payable on company fixed deposits is subject to tax deducted at source..