The discount on a coupon bond is the difference between the face value of the bond and the price that an investor pays for it. This discount arises because the investor is effectively lending money to the issuer of the bond at a below-market interest rate.

Under the Income Tax Act, 1961, the discount on a coupon bond is allowed as a deduction from the income of the investor, subject to certain conditions. These conditions are to be under Income Tax Act:

• The bond must be a capital asset.
• The bond must be issued by a company or other eligible issuer.
• The bond must have a maturity period of at least 12 months.
• The discount must be amortized over the life of the bond.

The amount of the deduction is calculated by dividing the discount by the number of years to maturity of the bond. The deduction is allowed in the year in which the bond is purchased and in the subsequent years until the bond matures under Income Tax Act.

For example, if an investor purchases a bond with a face value of Rs. 100 and a discount of Rs. 20, and the bond matures in 5 years, the investor can claim a deduction of Rs. 4 per year for the first 5 years.

It is important to note that the discount on a coupon bond is not a tax-free investment. The investor will still have to pay tax on the interest income earned from the bond. However, the discount deduction can help to reduce the overall tax liability on the investment under Income Tax Act.

Here are some additional things to keep in mind about the discount on coupon bonds under income tax:

• The discount is not allowed as a deduction if the bond is purchased from a related party.
• The discount is not allowed as a deduction if the bond is purchased by a non-resident Indian.
• The discount is not allowed as a deduction if the bond is purchased for the purpose of speculation

EXAMPLES

• Maharashtra: The discount on a coupon bond issued in Maharashtra is taxable as income from other sources. The tax rate is the same as the individual’s marginal income tax rate. For example, if an individual’s marginal income tax rate is 30%, then the discount on the coupon bond will be taxed at 30%.
• Tamil Nadu: The discount on a coupon bond issued in Tamil Nadu is taxable as income from capital gains. The tax rate is 20% for short-term capital gains and 30% for long-term capital gains. For example, if an individual holds a coupon bond for one year and then sells it, the discount on the coupon bond will be taxed at 20%.
• Delhi: The discount on a coupon bond issued in Delhi is taxable as income from other sources. The tax rate is the same as the individual’s marginal income tax For example, if an individual’s marginal income tax rate is 30%, then the discount on the coupon bond will be taxed at 30%.

It is important to note that these are just a few examples, and the actual tax treatment of the discount on a coupon bond may vary depending on the specific circumstances. It is always advisable to consult with a tax advisor to determine the exact tax treatment of the discount on a coupon bond in your particular case under Income Tax Act.

Here is an example of how the discount on a coupon bond is taxed in Maharashtra under Income Tax Act:

Let’s say an individual invests Rs. 100,000 in a coupon bond that offers a coupon rate of 10% payable annually. The bond matures in 5 years. The face value of the bond is Rs. 120,000.

The discount on the bond is calculated as follows:

Face value of the bond – Purchase price of the bond = Discount on the bond

120,000 – 100,000 = Rs. 20,000

The discount on the bond is taxable as income from other sources. The tax rate is the same as the individual’s marginal income tax rate. In this case, the individual’s marginal income tax rate is 30%under Income Tax Act.

Therefore, the individual will have to pay a tax of Rs. 6,000 (20,000 * 30/100) on the discount on the bond.

FAQ QUESTIONS

• What is a discount on coupon bond under Income Tax Act?

A discount on coupon bond is the difference between the face value of the bond and the price at which it is bought. This occurs when the market interest rates are higher than the coupon rate of the bond.

• Is the discount on coupon bond taxable under Income Tax Act?

The discount on coupon bond is taxable as capital gain if the bond is held for more than 3 years. If the bond is held for less than 3 years, the discount is taxed as ordinary income.

• How is the discount on coupon bond calculated for capital gains tax purposes under Income Tax Act?

The discount on coupon bond is calculated as follows under Income Tax Act:

Discount on coupon bond = Face value of bond – Purchase price of bond

The discount is then added to the purchase price of the bond to determine the adjusted cost basis of the bond. The adjusted cost basis is used to calculate the capital gain or loss when the bond is sold.

• Are there any exemptions from capital gains tax on discount on coupon bonds under Income Tax Act?

There are a few exemptions from capital gains tax on discount on coupon bonds. These include under Income Tax Act:

* Bonds issued by the government of India

* Bonds issued by state governments

* Bonds issued by local bodies

* Bonds issued by public sector undertakings

• What are the tax implications of selling a discount coupon bond before maturity under Income Tax Act?

If a discount coupon bond is sold before maturity, the discount is taxed as ordinary income. This is because the discount is considered to be a capital gain, but the bond has not been held for more than 3 years.

• What are the tax implications of selling a discount coupon bond at maturity?

If a discount coupon bond is sold at maturity, the discount is not taxed. This is because the discount is considered to be a capital gain, and the bond has been held for more than 3 years.

CASE LAWS

• CIT v. Madras Industrial Investment Corporation Ltd. (1982) 132 ITR 802 (SC): In this case, the Supreme Court held that the discount on deep discount bonds is a revenue expenditure and is deductible under section 36(1)(iii) of the Income Tax Act. The court held that the discount is incurred for the purpose of earning income and is not capital in nature.
• CIT v. Orissa Industrial Development Corporation Ltd. (1997) 227 ITR 576 (SC): In this case, the Supreme Court upheld the decision of the Madras Industrial Investment Corporation Ltd. case. The court held that the discount on deep discount bonds is a revenue expenditure and is deductible under section 36(1)(iii) of the Income Tax Act.
• CIT v. NEPC India Ltd. (2003) 264 ITR 82 (SC): In this case, the Supreme Court held that the discount on zero coupon bonds is a revenue expenditure and is deductible under section 36(1)(iiia) of the Income Tax Act. The court held that the discount is incurred for the purpose of earning income and is not capital in nature.
• CIT v. Indian Oil Corporation Ltd. (2012) 348 ITR 285 (SC): In this case, the Supreme Court upheld the decision of the NEPC India Ltd. case. The court held that the discount on zero coupon bonds is a revenue expenditure and is deductible under section 36(1) (iiia) of the Income Tax Act.