Taxation on Senior Secured Bonds can slightly vary depending upon factors like:

• Nature of the bond - Listed / Unlisted
• Period of holding
• Sale of bond before maturity

1.1 - If you hold a bond till maturity:

• Listed Bonds: The interest you earn will be taxed as per the tax slab under the heading “Income from Other Sources”. In line with the Union Budget 2023, a 10% TDS deduction will now be applied to the interest you earn post 1st April 2023.
• Unlisted Bonds: The interest you earn will be taxed as per the tax slab under the heading “Income from Other Sources”. There will be a 10% TDS deduction at the time of interest payout.

Irrespective of listed or unlisted bonds, you can also claim the deducted TDS back if you do not fall under any tax slab. If you hold the bond till maturity, you will not be liable for any Capital Gains tax (LTCG/STCG). You will only be paying tax on the interest earned. There will be no taxation/TDS on the principal amount.

Know more about TDS deduction and claiming it back.

1.2 - If you sell the bond before maturity:

If you sell the bond before maturity, any gains you make will be taxed as per the tax slab. Any interest you earn from the bond issuer, during the period you hold the bonds, will be charged as per the tax slab.

1.3 - When you purchase the bond at a price higher than face value:

Generally, the price you pay for bonds sold on our platform is higher than the face value. You pay this price as compensation to give the previous bondholder the accrued interest for the days he/she held the bond.

Upon maturity of any bond, the NBFC will always return the principal as per the Face Value of the bond and the total interest as per the coupon rate at which the bond was created. Irrespective of the price you purchase the bond at, the interest you receive from the bond issuer is treated as interest income and will be taxed as per your tax slab.

Worried about the taxation on the accrued interest you paid? We’ve got you covered :)

To ensure you pay taxes only on the interest earned post the deduction of the accrued interest, you can claim this back under Section 57 of the ITR form as interest expense while filing your taxes in the year you declare the income.

Example:

Bond X was created on 1st Jan 2023. The bond tenure is 12 months, and at the end of the tenure, the bond will give 10% YTM returns to the bondholder. Person A (buyer) subscribes to the bond on the day of the creation of the bond (T0 day) with an amount of INR 10,000 (Face value). Now A has to sell the bond after 6 months for some reason. Another person, B (new buyer), comes forward to purchase the bond from A (seller). Person A sells the bond to person B at INR 10,500 post adding accrued interest (INR 500) for holding the bonds for 6 months. On maturity, person B (new buyer) gets the principal (face value of the bond), i.e. INR 10,000 and the total interest which is INR 1000 (10% YTM).

So will Person B (new buyer) pay tax on INR 1000? No, Person B will only have to pay tax on total interest minus the accrued interest, which will be INR 1000 (total interest) - INR 500 (accrued interest) = INR 500 (Actual interest earned).

Person A (initial buyer), who sold to Person B (new buyer) after adding INR 500 as accrued interest, will have to pay interest only on the INR 500 amount. This way, both parties pay the correct tax on the interest earned.

Apart from interest, the price also gets increased/decreased in case the bond is sold at a premium/discount. For example, the seller holds the bond with an YTM of 10%. Now, they have decided to sell the bond at a premium, meaning the buyer will get 9%. To adjust the 1%, the future cashflows of bonds are discounted at 9%, giving the buyer a return of 9%.

Similarly, if the seller decides to sell the bond at a discount, say 11%, it will discount the future cashflows of the bond using 11% as the discount rate to ensure the buyer earns 11% on his/her investment.

In simple words, If you had purchased a bond with a Face Value of 1,00,000 for ₹1,01,000 and the entity is paying a total of 9,000 interest, then you have to show 9,000 as interest earned and 1,000 as cost of acquisition under section 57.

The entity will still deduct 10% TDS on 9,000 (900 rupees) only as that is the total interest paid by them, and you can set off or claim this 900 against your tax liability while filing your taxes.

Since SGBs, in a way, provide two incentives (interest and capital appreciation), you will be taxed differently for both of them.

2.1 - On 2.5% interest earned:

• Since RBI pays 2.5% p.a simple interest on the face value of SGBs, this is treated as interest income and comes under “Income from Other Sources”. Therefore, the interest is taxed as per the tax slab.

2.2 - On capital gains:

• Redeemed with RBI - RBI opens up redemptions of SGBs once the bond tenure reaches 5 years. The SGBs can be redeemed with RBI by informing your broker before the interest payout date. If you redeem the SGBs with RBI, your capital gains are tax-exempt.
• Selling SGBs in secondary market/exchange - If you sell the SGB on an exchange, you will be liable to pay capital gains tax.

If you hold the bond for less than 1 year >> Taxed as per tax slab

If you hold the bond for more than 1 year >> lower of i) 10% LTCG without indexation benefit or ii) 20% LTCG with indexation benefit

3.1 - What is TDS?

In line with the Union Budget 2023, a 10% TDS deduction will now apply to all the interest you earn post 1st April 2023. TDS is a flat 10% tax deducted at the source of the interest income from all bonds.

Income Tax Treatment – Bond interest income will be taxed per the normal tax slab rate applicable to investors and covered under “Income from other sources” when the investor files for ITR.

Example 1: Mr Sharma falls in the 20% income tax bracket, and interest earned through bonds is ₹2000 (Pre TDS), income tax liabilities will be ₹400. Since 10% TDS is deducted at source, the Interest payment that Mr Sharma receives is 1800 (post-TDS as 200 was already paid through TDS), and he only has to pay the additional ₹200 as tax while filing ITR or as advance tax.

Example 2: if Mr Ramesh falls in the 0% income tax bracket and interest earned through bonds is ₹2000 (Pre TDS), income tax liabilities will be ₹0. Now, since 10% TDS is deducted at source, the Interest payment that Mr Ramesh actually receives is 1800 (post-TDS as 200 was already paid through TDS), and he can claim back the entire 200 rupees while filing the ITR.

On interest payout of all bonds, a TDS of 10% will be deducted under section 193 of the income tax act, irrespective of the investment amount. However, investors can claim a refund by filing ITR if they do not fall into any tax bracket and are not liable to pay taxes or set off against their tax liability.

Note: TDS is only deducted from the interest you earn through the investment. There is no TDS deducted for the principal repayments.

The NBFC will deduct the TDS and deposit the same to the government within 7 days after the month's end.

The NBFC submits the TDS return within 30 days from the quarter's end. And the same TDS will reflect in your 26AS form maximum by 45 days after the quarter end.

For example, if payment (in which TDS was deducted) happens on 10 June 2023, the end of the quarter is 30 June 2023. This means the TDS would reflect in your Form 26AS by 15-20th August 2023.

More details about this are also available on Form 26AS (Form 26AS is an annual statement that includes all the details about the TDS) within 45 days from the end of the quarter in which payment was made by logging on to the income tax website.

The dates for the NBFC related to TDS are as below

Note - Since it is the financial year-end, the Government allows an extra one month to file the TDS return; hence it's not 45 days after the quarter ends like the other quarters.