ACCOUNTING & TAXATION:

Tax Treatment of Capital Gain/Loss Arising on Transfer of Perpetual Bonds

1. As per the section 2(14) a Perpetual Bond is a Capital Asset as the Assessee (i.e. your client in this case) is holding property in the bond.
2. As per the proviso to section 2(42A) a security (which also includes perpetual bond) listed on a recognised stock exchange will be treated as ‘Long Term Capital Asset’ if held for a period of more than 12 months on the date preceding to the date of its maturity or sale, as the case may be, by the assesse. If in a case period of holding is less than 12 moths then it will be treated as ‘Short Term Capital Asset’.
3. Under the provisions of section 45(1) capital gain/loss arising on transfer of capital asset shall be taxed under the head ‘Capital Gain’ and under section 2(47) transfer includes both ‘sale and relinquishment’ of the asset.
4. As per section 48 following shall be deducted while computing capital gain:
5. expenses wholly and exclusively incurred in respect of transfer; and
6. cost of acquisition.

No deduction shall be allowed in respect of STT paid by the assessee whether on acquisition or on sale.

• As per the 4^th proviso to section 48 no indexation benefit shall be available in respect of transfer of Bonds and Debentures other than:
  • Capital Indexed Bonds issued by the Government; and
  • Sovereign Gold Bonds issued by the RBI

Conclusion:

Any capital gain/loss arising on transfer of perpetual bond listed on a recognised stock exchange shall be treated as long term capital gain/loss if it was held for a period of more than 12 months on the date preceding to the date of transfer by the assessee otherwise short term capital gain. No indexation benefit is available for transfer of bonds.