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MCQ Self Challenge # 0066 on Taxability in case of Deep Discount Bonds

Taxability in case of Deep Discount Bonds

 

Dear Professional Seniors & Friends,
Warm Greeting!

Here is the Next post of #MCQ on concept based practical professional knowledge on Taxability in case of deep discount bonds under income tax act in a unique manner to be self answered by participants. The detailed answer of these MCQs shall be posted next day for the self assessment of the participants.

MCQ 66.1: Mr. X, an investor, purchase a deep discount bond having face value of Rs 1.5 Lakhs on 01.02.2017. Market Value of bond on 31.03.2017 is Rs 2.5 lakhs. On 20.03.2018 (redemption date of deep discount bond), Mr X got the redemption price of Rs 4.5 lakhs. What will be the tax effect on the date of redemption?
A) Rs 3 lakhs shall be capital gain income.
B) Rs 2 lakhs shall be capital gain income.
C) Rs 3 lakhs shall be interest income.
D) Rs 2 lakhs shall be interest income.

MCQ 66.2: What if in above question, Mr. X before the date of redemption, sells the deep discount bonds on 31.10.2017 for Rs 6 lakhs?

A) Rs 4.5 lakhs shall be capital gain income.
B) Rs 3.5 lakhs shall be capital gain income.
C) Rs 4.5 lakhs shall be interest income.
D) Rs 3.5 lakhs shall be interest income.

Sincere Regards

CA Sanjay Kumar Agrawal
Mobile: 9810116321

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——–Answer MCQ Self Challenge # 0066——–

 

Dear Professional Seniors & Friends,

Warm Greetings!

 

This post of MCQ is on concept relating to taxability of deep discount bonds in both cases where these are redeemed or where these are sold before the date of redemption.

 

Answer to MCQ 66.1: D) Rs 2 lakhs shall be interest income.

 

Answer to MCQ 66.2: B) Rs 3.5 lakhs shall be capital gain income.

 

Practical Analysis for MCQ 66.1& 66.2:-

  1. Upto 15/02/2002, the difference between the bid price (subscription price) and the redemption price (face value) of such bonds will be treated as interest income assessable under the Income-tax Act. On transfer of the bonds before maturity, the difference between the sale consideration and the cost of acquisition would be taxed as income from capital gains where the bonds were held as investment, and as business income where the bonds were held as trading assets.
  2. The matter then been examined in consultation with the Reserve Bank of India and the Ministry of Law. The Board then vide circular no. 2/2002 dated 15/02/2002 have decided that such income may hereafter be treated as follows –

General treatment

  1. Every person holding a Deep Discount Bond will make a market valuation of the bond as on the 31st March of each Financial Year and mark such bond to such market value.
  2. The difference between the market valuations as on two successive valuation dates will represent the accretion to the value of the bond during the relevant financial year and will be taxable as interest income (where the bonds are held as investments) or business income (where the bonds are held as trading assets).

 

Transfer before maturity

 

  1. Where the bond is transferred at any time before the maturity date, the difference between the sale price and the cost of the bond will be taxable as capital gains in the hands of an investor or as business income in the hands of a trader. For computing such gains, the cost of the bond will be taken to be the aggregate of the cost for which the bond was acquired by the transferor and the income, if any, already offered to tax by such transferor upto the date of transfer.
  2. Since the income chargeable in this case is only the accretion to the value of the bond over a specific period, for the purposes of computing capital gains, the period of holding in such cases will be reckoned from the date of purchase/subscription, or the last valuation date in respect of which the transferor has offered income to tax, whichever is later. Since such period would always be less than one year, the capital gains will be chargeable to tax as short-term capital gains.

 

Redemption

 

  1. Where the bond is redeemed by the original subscriber, the difference between the redemption price and the value as on the last valuation date immediately preceding the maturity date will be taxable as interest income in the case of investors, or business income in the case of traders.
  2. So in our case, Rs 1 lakhs(2.5-1.5) shall be taxed as interest income in F.Y. 2016-17, hence cost of bond will become Rs 2.5 Lakhs(1.5+1).
  3. Based on the above analysis, correct answer MCQ 1 : D) Rs 2 lakhs shall be interest income.
  4. Correct answer MCQ 66.2 : B) Rs 3.5 lakhs shall be capital gain income.

 

(Disclaimer: The objective of the MCQ post is just to discuss the concept, it may happen, by change of facts, the answer may be different. Please do not treat this as professional opinion; you can definitely have your own opinion.)

 

Sincere Regards!

 

CA Sanjay Kumar Agrawal

Mobile: 9810116321

 

To access MCQ posts regularly, please Join Telegram Channel:
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