How are Non-Convertible Debentures (NCDs) taxed? Should they be sold before maturity in secondary market with Security Transaction Tax (STT) paid, to derive indexation benefits? Please clarify.
The debentures that cannot be converted to equity of the issuing company are referred as non-convertible debentures. NCDs usually carry higher interest rates compared with convertible debentures.
Held to maturity debentures: The interest earned on these is treated as income from other sources and is clubbed to your income and taxed according to the applicable income tax slab rate. NCDs can also be sold in the secondary market before their maturity, which changes the tax treatment.
NCD sold within a year of issue: Such a sale gives rise to short-term capital gain (loss), which is then clubbed into your income and taxed according based on the applicable income tax slab rates.
NCD sold after 1 year of issue and before maturity: Such a sale gives rise to long-term capital gains (loss), which is taxed @10 per cent excluding surcharge.
When selling NCDs in the secondary market, there is no indexation benefit available and no Securities Transaction Tax (STT) levied. Further, it should be noted that selling the debentures in secondary market will be possible based on its market demand, because you will be able to sell the NCD only if there is a buyer willing to buy at the quoted price.