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    Taxation of income from Non Convertible Debentures (NCDs)/ Corporate Bonds

    There are many companies issuing non convertible debentures these days. Since the rate of interest offered on these bonds are attractive, many investors feel the need to subscribe to these bonds. While there are several considerations in buying these bonds, one of the key considerations is taxation of these bonds. Before buying non convertible debentures, it is important to understand the tax that is levied on income/gains made on these bonds. The article explains tax on non convertible debentures in two scenarios: 1) When you hold these bonds till maturity and 2) When you sell these bonds before maturity on stock exchange.

    Taxation Scenarios

    When you hold non convertible debentures till maturity
    If you buy a non convertible debenture and hold it till maturity, the interest earned on the debenture will be added to your income under ,’ Income from other sources’ and the tax will be calculated on it as per the income tax slab your income falls. This means that if your income is in 10% bracket, the tax will be levied at the rate of 10% and so on. The principal amount received on maturity is not taxed at all. The tax treatment of coupon/interest received from NCDs is same as the interest income received from a bank FD.

    When you sell non convertible debentures before maturity
    Suppose you decide to sell NCDs on stock exchange where it is traded, then the tax treatment is different. If you decide to sell the NCDs on the stock exchange, capital gains can also arise. If NCDs are sold within 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.
    STCG is taxed the same way as your coupon income mentioned above, the LTCG is taxed at a flat rate of 10% plus the other cess as applicable. The benefit of indexation is not given on non convertible debentures like other capital assets.

    Tax treatment of corporate bonds is same as non convertible debentures.

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