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Taxing Non Convertible Debentures

Capital gains can arise when selling NCDs on the stock exchange

How are Non-Convertible Debentures taxed? Are they treated as income on hand if held to maturity? Should they be sold before maturity in secondary market with Security Transaction Tax (STT) paid, to derive indexation benefits? Please clarify.

Non-Convertible Debentures are simple debentures that cannot be converted into equity shares of the issuing company. These debentures usually carry interest rates higher than Convertible Debentures.

For tax purpose, interest earned on NCD held till maturity is considered as Income from Other Sources which is clubbed into income of the debenture holder and taxed as per the applicable income tax slab rate. Selling listed NCD in secondary market before maturity has two implications:
a) NCD sold within one year of issue will give rise to Short Term Capital Gain/ Loss which would be clubbed into debenture holder's income and taxed according to applicable slab rate.
b) NCD sold after one year of issue but before maturity will give rise to Long Term Capital Gain/Loss which will be taxed at 10 per cent with added surcharge. No indexation benefits are available on selling listed NCDs in secondary market. Also, Securities Transaction Tax (STT) does not apply in case of debentures.

Further, it should be noted that selling the debentures in secondary market will be possible based on its market demand. You would be able to sell only if someone is ready to buy at the quoted price.

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