Taxation may not necessarily be the reason why an investor invests in a particular security, but knowing the tax implications on your investments is necessary. Here’s a quick guide to understand how your bond investments are taxed –
Resident and Non-Resident Indians:
Are you a Resident?
A person who has stayed in India 182 days or more or 60 days or more in a given financial year and 365 days or more in the 4 immediately preceding previous years.
Are you an NRI?
Any person who does not qualify as a Resident based on the criteria mentioned above, is a Non-Resident Indian.
For NRIs – What is the purpose of NRE and NRO accounts?
The purpose of an NRE account is to park foreign earnings (taxed abroad), this account is exempt from tax hence Indian income cannot be transferred here. NRO on the other hand is taxed and hence income earned by NRIs in India has to be transferred to this account. The foreign earnings parked in an NRE account can be invested however, the interest earned on the investment can only be credited to the NRO account.
Tax on Interest Income:
Interest income on all bonds (listed and unlisted) except tax free bonds would be taxed as per the applicable slab rates. For the purpose of calculating total income, interest income usually comes under the head ‘Other Income’. After arriving at the net income, slab rates are applied on the income to derive the total tax on income.
Residents are taxed differently based on age which divides residents into three categories – Individual (below 60 years), Senior citizen (60 to 80 years) and Super Senior Citizen (above 80 years).
For Non-Residents whether aged below 60 Years, above 60 – 80 Years and above 80 Years. All are taxed uniformly.
For Individuals below the age of 60, all NRIs and HUFs:
For individuals between the age of 60 and 80 – Senior Citizens:
Announced in Budget 2020 – No Income Tax Return filing requirement for Senior Citizens (Aged 75 years and more) having only pension and interest income.
For individuals above the age of 80 years – Super Senior Citizens:
Applicable for all individual tax payers:
- Rebate of up to Rs 12,500 is available under section 87A under both tax regimes. Thus, no income tax is payable for total taxable income up to Rs 5 lakh in both regimes.
- Rebate under section 87A is not available for NRIs and Hindu Undivided Families (HUF)
- Cess at the rate of 4% is applicable on the income tax amount.
- Surcharge at different rates on the income tax is applicable before the levy.
*Surcharge over 15% is not applicable for income chargeable to tax under sections 111A, 112A and 115AD
Tax Deducted at Source:
Issuers deduct tax at source on interest income payable to bond holders. This amount which has been deducted, can be shown as part of your tax returns and can be adjusted against the tax liability finally calculated for the interest received. To avail adjustments, a TDS certificate is required from the bond issuer. For interest on corporate deposits, no tax is to be deducted if the total amount of interest during the financial year does not exceed Rs.5000 in case of residents. Also, since tax free bonds are exempt from tax, no TDS will be deducted on the interest earned on such bonds.
TDS on securities is covered under Sec 193 (for residents) and under Sec 195 (for non-residents)
TDS rates for resident u/s 193:
|Particulars||TDS Rates from 01.04.2020 to 13.05.2020||TDS Rates from 14.05.2020 to 31.03.2021||TDS Rates for FY21-22|
Submission of a valid PAN:
The individual shall furnish his Permanent Account Number to the person responsible for deducting such tax, failing which tax shall be deducted at the higher of the following rates, namely:
(i) at the rate specified in the relevant provision of this Act; or
(ii) at the rate or rates in force; or
(iii) at the rate of twenty per cent
A TDS of 30% is applicable on the interest income which is to be credited to the NRO account. It is to be kept in mind that even if you have invested the funds parked in your NRE account, TDS will be deducted at 30% along with additional surcharge and education cess.
Any sale of asset resulting into a profit is booked under the head ‘Capital Gains’. Capital gains are further categorized into short term (STCG) and long-term gains (LTCG), both apply different tax rates. When you sell a bond, the holding period determines whether it would come under STCG or LTCG.
In case of listed bonds and zero-coupon bonds (whether quoted or not) – It would be considered long term if it is held for a period exceeding 12 months and would be considered short term for a period less than 12 months. In case of unlisted bonds capital gains are long term if the holding period exceed 36 months and short term otherwise.
Indexation adjusts the purchase price of an asset in line with inflation. An assessee cannot take benefit of indexation for 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).
Computation of Capital Gain:
STCG from sale of bonds is taxable as per applicable slab rates.
LTCG are taxed as per the following rates:
|Particulars||Listed Bonds (>12 months)||Tax Free Bonds – Listed* (>12 months)||Tax Free Bonds – Unlisted* (>36 months)|
|LTCG Tax Rate||10.4%||10.4%||20.8%|
*These rates are applicable if the bonds are sold before maturity
Long-term capital gains arising from transfer of listed securities, units or a zero-coupon bond shall be taxable at lower of following:
(i.) 20% after taking benefit of indexation; or
(ii.) 10% without taking benefit of indexation.
Tax free bonds which are held to maturity are exempt from tax.
What are the Capital Gain implications for NRIs?
STCG is taxed based on slab rate. For LTCG, the same rates apply as mentioned in the table above. Benefit of indexation cannot be availed by NRIs.
54EC Bonds are also known as capital gain bonds, they’re meant for investors earning an income from LTCG wanting to get an exemption on these gains, they’re also referred to as tax-saving bonds. These bonds are unlisted and issued by National Highway Authority of India, Rural Electrification Corporation and Power Finance Corporation and usually have a high credit rating. Earlier these bonds were of three-year duration. However, since April 2018, it has been increased to five years. Interest rates of these bonds have changed over the years. Since August 1st 2020, interest rates on REC bonds have been reduced from 5.75% to 5% per annum.
If a person earns an income by way of long-term capital gains – for example if they sold a property an earned a long-term capital gain, they can invest this gain in a tax-saving bonds to avail tax exemption. The investment has to take place withing 6 months from the sale of property (date on which LTCG has arised) but not beyond the due date for furnishing income tax returns. Tax-saving bonds come with a mandatory lock in period of 5 years, they cannot be sold in the secondary market or offered as a security for any loan. Minimum investment in 54EC bonds is 1 bond amounting to Rs. 10,000 and the maximum investment in 54EC bonds is 500 bonds amounting to Rs 50 lakhs in a financial year.
Interest on 54EC bonds is taxable and is computed as per the slab rates. No TDS is deducted on interest from 54EC bonds and wealth tax is exempted.
At the time of maturity these bonds are taxed under Long Term Capital Gains at 20.8%.