The finance ministry has clarified the new tax rules relating to deep discount bonds and said the modified tax treatment corrects the anomalies in the existing system.
The ministry denied that the new treatment is anomalous, and said the new system provides a mechanism for taxing the income accruing from year to year on deep discount bonds, on the same lines as the income from normal coupon-bearing bonds is taxed. The transfer of the bonds before maturity will attract capital gains tax, as is the practice now. In a press note issued here, the department of revenue said the earlier system of taxing the entire income from such bonds in the year of redemption was anomalous in that it gave rise to a sudden and huge tax liability in one year, while the value of the bond was progressively increasing over the period of holding.
Further, when the bond was redeemed by a person other than the original subscriber, that person was taxed on the entire difference between the bid price and the redemption price as interest income. Such a system also created tax induced distortions in the debt market.
It notes that the income from deep discount bonds accrues continuously over the period of holding and can be realised at any time by selling the bond. Taxing income from such bonds on an annual accrual basis is stated to be a worldwide practice.
The present circular issued by the Central Board of Direct Taxes also does not have a retrospective tax effect. It specifies the tax treatment for bonds issued after the circular and is not meant for existing bondholders. Further, non-corporate persons who invest small amounts in new issues - face value up to Rs 1 lakh - can still opt for the old system.
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