Tax on interest paid by Government Securities

Bonds
1

I had purchased a G-Sec with a coupon rate of 7.19% (matures in 2060). Its interest was due on 15th September (as mentioned here).

As the interest landed in my bank account, I noticed that it was 15% less than the amount that I expected. After reading up on Varsity, I concluded that I had been charged STCG. Here, my question is that I had purchased these GSec at the steep premium of 114 (Face value is 100), then how was STCG charged on them given that they are trading at a value less than at what I had purchased. When checking if appreciation has happened in G-Sec price, is the price at which they are traded on NSE/BSE not taken into account? Are G-Sec prices on RBI’s NDS-OM taken for reference?

Also, reading up in Varsity, I noticed that the interest from the G-Sec will be taxed under Income from Other Sources as per tax slabs. From what I understand, this tax will be after the 15% STCG. Is this assumption correct? If my assumption is correct, then the tax rate for these bonds becomes very high. Given such high taxation, the real return for these instruments falls badly. I wanted to ask, in what scenario does investing in G-Sec make sense?

2

Hmm, no, taxes you have to pay, they aren’t automatically deducted.

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3

How do we purchase G- Secs and SDLs from Zerodha. Can you please help

4

You can do so from Coin, or if the bond is listed on the exchange you can also invest through Kite. You can also explore more on GoldenPi.

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5

Hi @Prayag,

It might seem silly, but what was the period (in days) which you had considered while computing the expected half-yearly interest payout ? Since, this is the first payment and this particular series was issued on 13-April-2020, you would have to consider 155 (or) 156 days (the interest would work out to ~Rs. 3.073 on nominal value of Rs. 100)…

As was mentioned earlier in the thread, taxes would not be deducted at source (i.e., upfront deduction) on the interest payout made in respect of a Government Security (refer exceptions to deduction of Tax at Source u.s. 193 - I-T Act).

Moreover, the general point of taxation as regards capital gains, is the time of sale of the asset/security and even then, unless you are a non-resident, there will not be any upfront deduction of taxes. So, most likely, I do not think the lesser than expected interest payment has anything to do with taxes…

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6

Thanks for sharing this. Indeed my conclusion was flawed.

I had calculated the expected payout simply by dividing the coupon rate by 2 without thinking about the date when this particular series was issued. Hence, when the payout was 3.036 instead of the expected payout of 3.595 (gotten by dividing 7.19 by 2), I wrongly concluded that I had been taxed.

Also, I had a come across a comment on the Varsity chapter which mentioned about the 15% STCG tax & by sheer chance, the difference in the interest payout also came to be around 15% ( (3.595-3.036)/3.595*100 ) which further lead to me believing my flawed logic

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