Tax liability of bonus debenture
This query is : Resolved
Querist : Anonymous
Querist :
Anonymous
(Querist)
13 September 2012
I am a retired Govt employee.
I have received Bonus Debenture with 11.5% Intt rate,payable annually. the Debentures will redeem after 3yrs, till then I will get the Interest on its face value.
I am adding Interest to my income any calculating Tax.
At the end of 3 yrs, the Debenture will redeem. what will be the Tax liability at that time and how will it be calculated?
It may be either:-
1. Added directly to my salary/ pension along with Intt amount?
2. It can be treated as stock and Long Term capital Gains will apply and there will not be any Tax liability?
3. Any third mode of Tax liability?
I have received Bonus Debenture with 11.5% Intt rate,payable annually. the Debentures will redeem after 3yrs, till then I will get the Interest on its face value.
I am adding Interest to my income any calculating Tax.
At the end of 3 yrs, the Debenture will redeem. what will be the Tax liability at that time and how will it be calculated?
It may be either:-
1. Added directly to my salary/ pension along with Intt amount?
2. It can be treated as stock and Long Term capital Gains will apply and there will not be any Tax liability?
3. Any third mode of Tax liability?
14 September 2012
The debenture it is a long term capital asset and the gain arising on redemption shall be exempt from tax.
Querist : Anonymous
Querist :
Anonymous
(Querist)
14 September 2012
I have shares of one company against which this Bonus Debenture has been given by company.I am getting Intt each year and adding to my salary each year.
But what will be after 3rd year, when the Principal of Bonus Debenture will be paid to me, whether it will be Taxable or Tax free?
But what will be after 3rd year, when the Principal of Bonus Debenture will be paid to me, whether it will be Taxable or Tax free?
26 July 2025
Thanks for the detailed background — this is a very good and nuanced question. You're referring to **Bonus Debentures** received **against shareholding**, and want to know the **tax treatment upon redemption after 3 years**. Let's clarify it fully under Indian tax laws.
---
## 🔍 **Situation Summary**
* You received **Bonus Debentures** (not purchased, but allotted free as a shareholder).
* You are receiving **interest @11.5% annually**, which you are correctly adding to your taxable income under **"Income from Other Sources"**.
* The debentures are to be **redeemed after 3 years** (principal repayment).
* You want to know the tax treatment on **redemption of the debentures**.
---
## ✅ **Tax Treatment – Component-wise**
### 🔹 1. **Interest Received (Annually)**
* Fully **taxable** in the year of receipt.
* Taxable under **"Income from Other Sources"**.
* You've already handled this correctly.
---
### 🔹 2. **Principal Amount on Redemption (at the end of 3 years)**
Since these **Bonus Debentures were allotted free of cost**, you **didn’t pay anything** to acquire them. Now, on redemption, you are **receiving money**, so this may seem like a gain — but the tax law handles it **carefully**.
Here's how:
#### 📌 **Capital Gain Applicability**
* **Bonus Debentures are treated as capital assets** under the Income Tax Act.
* Your **cost of acquisition is taken as NIL**, since you didn't pay anything.
* So, the **entire redemption amount** becomes **capital gain**.
#### 📌 **Long-Term or Short-Term?**
* If held **more than 12 months** before redemption → **Long-Term Capital Gain (LTCG)**
* Since you hold them for **3 years**, it's **LTCG**.
#### 📌 **Is LTCG Taxable?**
This is where it depends on the **nature of the debenture**:
---
### ✅ **If Listed Bonus Debentures**
(e.g. traded on stock exchanges, even occasionally)
* **Long-Term Capital Gains** on **listed debentures** are **taxable at 10% without indexation** under Section 112.
* However, **many courts and CBDT have clarified** that **bonus debentures (redeemable)** are treated as a **return of capital** and in some cases, **not taxable** if considered in the nature of a **deemed dividend**.
👉 **But**, in general practice:
> **Redemption of listed bonus debentures** = **LTCG**, taxed at **10%** (without indexation).
---
### ❌ **If Unlisted Bonus Debentures**
* **LTCG is taxed at 20% with indexation**, but **your cost is NIL**, so no indexation.
* Hence, **full amount is taxable** as LTCG @ 20%.
But since you **received it free**, this seems harsh. Here, many tax experts argue it should **not be taxed**, as it is a **capital restructuring** or **deemed dividend**, especially when issued under a scheme of arrangement.
---
## 🔹 Practical Answer
| Event | Tax Treatment |
| ------------------------ | -------------------------------------------------------------------------------------------------------------------------------- |
| Annual Interest @11.5% | ✅ Fully taxable as **"Income from Other Sources"** |
| Redemption of Principal | ✅ **Long-Term Capital Gains** with NIL cost of acquisition |
| Listed Debenture | 🔸 LTCG @ **10% (without indexation)** |
| Unlisted Debenture | 🔸 LTCG @ **20% (without indexation, as cost is zero)** |
| Possible Exemption Cases | ⚠️ Some debentures issued under capital restructuring may be **treated as tax-free return of capital** (need facts of your case) |
---
## ✅ **Recommended Action**
1. **Check if debenture is listed** on stock exchange — that affects rate.
2. **Get a copy of the scheme/document** under which bonus debentures were issued. If it was under a **court-approved scheme of arrangement**, the **principal may be exempt**.
3. Maintain a **paper trail** of allotment, ISIN, and interest statements.
4. Declare capital gains in your **ITR under "Capital Gains"** section in the year of redemption.
5. Consult a CA for exact treatment based on your debenture type.
---
Would you like help **drafting the capital gains schedule** or **checking exemption clauses** from a specific bonus debenture scheme? If you can tell me the company name and year of issue, I can look it up.
---
## 🔍 **Situation Summary**
* You received **Bonus Debentures** (not purchased, but allotted free as a shareholder).
* You are receiving **interest @11.5% annually**, which you are correctly adding to your taxable income under **"Income from Other Sources"**.
* The debentures are to be **redeemed after 3 years** (principal repayment).
* You want to know the tax treatment on **redemption of the debentures**.
---
## ✅ **Tax Treatment – Component-wise**
### 🔹 1. **Interest Received (Annually)**
* Fully **taxable** in the year of receipt.
* Taxable under **"Income from Other Sources"**.
* You've already handled this correctly.
---
### 🔹 2. **Principal Amount on Redemption (at the end of 3 years)**
Since these **Bonus Debentures were allotted free of cost**, you **didn’t pay anything** to acquire them. Now, on redemption, you are **receiving money**, so this may seem like a gain — but the tax law handles it **carefully**.
Here's how:
#### 📌 **Capital Gain Applicability**
* **Bonus Debentures are treated as capital assets** under the Income Tax Act.
* Your **cost of acquisition is taken as NIL**, since you didn't pay anything.
* So, the **entire redemption amount** becomes **capital gain**.
#### 📌 **Long-Term or Short-Term?**
* If held **more than 12 months** before redemption → **Long-Term Capital Gain (LTCG)**
* Since you hold them for **3 years**, it's **LTCG**.
#### 📌 **Is LTCG Taxable?**
This is where it depends on the **nature of the debenture**:
---
### ✅ **If Listed Bonus Debentures**
(e.g. traded on stock exchanges, even occasionally)
* **Long-Term Capital Gains** on **listed debentures** are **taxable at 10% without indexation** under Section 112.
* However, **many courts and CBDT have clarified** that **bonus debentures (redeemable)** are treated as a **return of capital** and in some cases, **not taxable** if considered in the nature of a **deemed dividend**.
👉 **But**, in general practice:
> **Redemption of listed bonus debentures** = **LTCG**, taxed at **10%** (without indexation).
---
### ❌ **If Unlisted Bonus Debentures**
* **LTCG is taxed at 20% with indexation**, but **your cost is NIL**, so no indexation.
* Hence, **full amount is taxable** as LTCG @ 20%.
But since you **received it free**, this seems harsh. Here, many tax experts argue it should **not be taxed**, as it is a **capital restructuring** or **deemed dividend**, especially when issued under a scheme of arrangement.
---
## 🔹 Practical Answer
| Event | Tax Treatment |
| ------------------------ | -------------------------------------------------------------------------------------------------------------------------------- |
| Annual Interest @11.5% | ✅ Fully taxable as **"Income from Other Sources"** |
| Redemption of Principal | ✅ **Long-Term Capital Gains** with NIL cost of acquisition |
| Listed Debenture | 🔸 LTCG @ **10% (without indexation)** |
| Unlisted Debenture | 🔸 LTCG @ **20% (without indexation, as cost is zero)** |
| Possible Exemption Cases | ⚠️ Some debentures issued under capital restructuring may be **treated as tax-free return of capital** (need facts of your case) |
---
## ✅ **Recommended Action**
1. **Check if debenture is listed** on stock exchange — that affects rate.
2. **Get a copy of the scheme/document** under which bonus debentures were issued. If it was under a **court-approved scheme of arrangement**, the **principal may be exempt**.
3. Maintain a **paper trail** of allotment, ISIN, and interest statements.
4. Declare capital gains in your **ITR under "Capital Gains"** section in the year of redemption.
5. Consult a CA for exact treatment based on your debenture type.
---
Would you like help **drafting the capital gains schedule** or **checking exemption clauses** from a specific bonus debenture scheme? If you can tell me the company name and year of issue, I can look it up.
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