Taxation of Nonconvertible Debentures

Zero coupon rate NCDs pay out all their gains as a lump sum after few years. Could you please explain investors' tax liability?
-Tilak Sarkar

Non Convertible Debenture (NCD) are either issued at face value carrying a periodic interest payout at a fixed rate or be sold at a discount to face value. In either of the two cases, at the time of redemption, it is the face value that is paid out. From a pure returns perspective, the two are identical because the discount is effectively equivalent to the interest rate.

In the discount option, the difference between initial price and the face value is treated as capital gains and is taxed at 10 per cent plus 3 per cent cess without indexation. Unlike other debt instruments, cost indexation benefit is not allowed on debentures and bonds. This is the treatment in case of long term capital gains. In case of short term capital gains, it's just added to your taxable income.

This article was originally published on April 16, 2014.