What are Bonds?
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- Bonds are issued by Government/Companies, generally to public.
- It is a kind of loan taken by them on which they pay fixed rate of interest.
- These bonds have a maturity date and whole amount including interest are repaid on maturity
What are Zero Coupon Bonds
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- Normal bonds carry coupons i.e. a fix rate of interest is received on them.
- However, on zero coupon bonds no interest is received
- In this case bonds are issued at some discounts and on their Maturity their par value is received
Taxability of Zero Coupon Bonds
Taxability On Maturity
As per section 2(47) the maturity of zero coupon bonds shall be regarded as transfer and capital gains will be computed on it.
Taxability Before Maturity
However, if they are sold before maturity then also capital gains is computed .
Period of Holding
In case of Zero Coupon Bonds,period of holding should be more than 12 months to be classified as long term
Capital Gain on Zero Coupon Bonds can be both Short Term or Long Term
- If they are held for a period up to 12 months
Short term capital gains is computed as these are STCA
- b) If they are held for more then 12 months then
Either LTCG computed with indexation taxable at 20%
or
LTCG Computed without taxation taxable at 10%
as per the choice of the assessee .
Same is also applicable in case of
- Listed Shares
- Mutual Fund issued betweeen 1/04/14 to 30 July 2014
QUESTIONS
Q1
Mr A purchased a zero coupon bonds for Rs 72000 on 15 May 2012
Its par value on maturity is Rs 100000 on 14 May 2015
Fair Market value on different dates is
| Date | FMV |
| 31-Mar-13 | 76000 |
| 31-Mar-14 | 84000 |
| 31-Mar-15 | 95000 |
| 14-May-15 | 100000 |
CII for 2012-13,2013-14,2014-15,2015-16 are 852,939,1024,1081
Calculate Capital gain if he helds the asset till maturity
View answer
In this case,Capital gain will be payable on 14-05-2015 on Maturity and not before that
Since It is held for more than 1 year,it is LTCG
He has 2 options
Option 1-LTCG taxable @ 10% Withour Indexation
| Particulars | Amt |
| Full Value of Consideration | 100000 |
| Less | |
| Expenses of Transfer | 0 |
| COA | 72000 |
| COI | 0 |
| Long Term Capital Gain/(Loss) | 28000 |
| Tax on LTCG@10% | 2800 |
Option 2
LTCG taxable @ 20% with indexation
ICOA=72000*1081/852=91352
| Particulars | Amt |
| Full Value of Consideration | 100000 |
| Less | |
| Expenses of Transfer | 0 |
| ICOA | 91352 |
| ICOI | 0 |
| Long Term Capital Gain/(Loss) | 8648 |
| Tax on LTCG@20% | 1730 |
Hence Option 2 is preferred as he has to pay less tax
Q2
Suppose in Q1 he sells the Zero Coupon Bond on 31-3-13 for 76000
View answer
Period of holding is from 15 May 2012 to 31-March-2013 is less than 1 year
Hence it is STCG
Short term capital gain is computed as folllows
| Particulars | Amt |
| Full Value of Consideration | 76000 |
| Less | |
| Expenses of Transfer | 0 |
| COA | 72000 |
| COI | 0 |
| Short Term Capital Gain/(Loss) | 4000 |
Q3
Suppose in Q1 he sells the Zero Coupon Bond on 31-3-14 for 95000
View answer
Period of holding is from 15 May 2012 to 31-March-2014 is more than 1 year
Hence it is lTCG
Long term capital gain is computed as folllows
He has 2 options
Option 1-LTCG taxable @ 10% Withour Indexation
| Particulars | Amt |
| Full Value of Consideration | 95000 |
| Less | |
| Expenses of Transfer | 0 |
| COA | 72000 |
| COI | 0 |
| Long Term Capital Gain/(Loss) | 23000 |
| Tax on LTCG@10% | 2300 |
Option 2
LTCG taxable @ 20% with indexation
| Particulars | Amt |
| Full Value of Consideration | 95000 |
| Less | |
| Expenses of Transfer | 0 |
| ICOA | 79352 |
| ICOI | 0 |
| Long Term Capital Gain/(Loss) | 15648 |
| Tax on LTCG@20% | 3130 |
Option 1 is preferable as he has to pay less tax