For Tax Free Bonds such as the IRFC (INE053F07652) BOND 8.23% PA TF TI-SIA,(DATE OF MATURITY 18/02/2024) which is currently trading at 1080.
Suppose I buy on 6/10/22 100 units for 1080 - Rs. 1,08,000
Future Interest cashflows
18/2/23 - Rs. 8,230
18/2/24 - Rs. 8,230
Principal Repayment - 18/2/24 - Rs. 1,00,000
If I buy it from secondary market like NSE/BSE I am eligible for tax free interest benefits.
Interest payments of Rs. 16,460 are tax free.
@Quicko can you please tell the correct way to evaluate the capital gains or loss
If I hold till maturity I get back Rs. 1,00,000
a. Can I book loss of Rs.8,000 (logic being I paid 1.08L for the security and 1L on maturity) as capital loss in FY 24 ?
b. The capital loss needs to be evaluated on the clean price at the time of buying the bond which would be 1080-(82.3*0.75(roughly the amount of interest period that would have accrued on 5th Oct)) which makes it Rs. 1018, so assuming the clean price of acquisition can I claim Rs. 1800 as Capital Loss ?
c. No capital loss or gain can be claimed at time of maturity.
Same question as 3 but this time I sell before maturity in secondary market depending on the price sold at can I claim capital loss/gain and do I need to consider the clean price at time of buying and selling or the calculation can be done on dirty price also.
1 & 2. Interest payments will remain tax-free even if you buy these bonds from the secondary market.
3 & 4. You can consider dirty price as cost always, regardless of whether you hold till maturity or exit. Applying the clean price method may be more difficult to rationalise with the Income Tax Office if your returns are scrutinised and you have not employed the same accounting principles consistently.
If you’re considering investing in tax-free bonds, it’s important to understand the tax treatment of the capital gains and losses on these bonds. Any capital gain or loss is treated as though it occurred on a taxable bond when you sell a tax-free bond. It means you’ll pay taxes on any profits but won’t get a deduction for any losses. That means you’ll pay taxes on any gains but won’t get a deduction for any losses. So, if you’re thinking about investing in these types of bonds, it’s something to keep in mind.
The reason I am saying to use clean price is because in dirty price there can be instances where one can buy the bond at lets say 1080 just before the interest payment date and then sell the bond just after the interest is received at around 1000 (assuming the coupon yield is 8%) I will have tax free interest income and I can also claim capital loss of 80, so clean price sounds most appropriate to me but couldn’t find any good resource on the way it should be computed.
You have understood it right. You will be taxed at the applicable tax rate for the Capital gains on sale of tax-free bonds on stock exchange that was held for a period of less than 12 months. Similarly, if it is held for more than 12 months, the gains will be taxed at 10.3%.
What do you mean by no deduction for losses here ? Are you saying if one has capital gains they need to pay taxes but if there is capital loss then that loss cannot be used to offset other capital gains or carry forwarded to next years as is allowed for other capital loss scenarios.
For Tax-Free Bonds such as the IRFC, the interest payment will remain tax-free even if you buy from NSE/BSE. Hence the interest payment of Rs. 16,460 is tax-free. You can trade these bonds in secondary markets before the maturity period. The gain/loss will be computed based on the sale value and the initial value of the actual investment in the secondary market. No capital loss or gain can be claimed at the time of maturity.
Can you please expand on this, if that is the case then if someone buys a bond at discount from face value say 900 and holds till maturity, and when 1000 is returned as principal, is the Rs.100 tax free ?
Or will it be taxable and if so which head will it go under ?
The taxability of gain on redemption of bonds held till maturity is explained by the following cases:
If the bond was issued at discount and redeemed at par - The difference between Invested value and redeemed value will be taxed under Income from capital gains. (Bonds are not issued at discount in India anymore, however, if you purchase bonds at a discounted price from the secondary market then capital gains shall arise)
If the bond was issued and redeemed at par - No capital gain shall arise in this scenario.
Retail investors can invest in tax-free bonds up to ₹5 lakhs.
Public undertakings like the National Highway Authority of India, Rural Electrification Corporation, NTPC Limited, Indian Railways, Indian Renewable Energy Development Agency, Housing and Urban Development Corporation, Power Finance Corporation, and Rural Electrification Limited issue tax-free bonds.
They are also traded in the secondary market.
Tax-free bonds are usually issued for a longer tenure of 10, 15, or 20 years. The interest earned from these bonds is tax-free. These bonds are almost risk-free since they are issued by government-backed entities, hence the probability of default of the interest payment as well as principal repayment is quite low.
For people who have a regular decent income, tax-free bonds are a good option to invest in, especially people who fall in a higher tax bracket, it is a good option as the interest is tax-free.